Rucky Company and Stone Company experienced the exact same set of economic events during 2010. Both companies
Question:
Rucky Company and Stone Company experienced the exact same set of economic events during 2010. Both companies purchased machines on January 1, 2010. Except for the effects of this purchase, the accounting records of both companies had the following accounts and balances.
As of January 1, 2010
Total Assets ............... $400,000
Total Liabilities .............. 160,000
Total Stockholders’ Equity ........ 240,000
During 2010
Total Sales Revenue ............ 200,000
Total Expenses (not including depreciation) .. 120,000
Liabilities were not affected by transactions in 2010.
The machines purchased by the companies each cost $80,000 cash. The machines had expected useful lives of five years and estimated salvage values of $8,000. Rucky uses straight-line depreciation. Stone uses double-declining-balance depreciation.
Required
a. For both companies, calculate the balances in the preceding accounts on December 31, 2010, after the effects of the purchase and depreciation of the machines have been applied.
b. Based on the revised account balances determined in Requirement a, calculate the following ratios for both companies.
(1) Debt to assets ratio.
(2) Return on assets ratio.
(3) Return on equity ratio.
c. Disregarding the effects of income taxes, which company produced the higher increase in real economic wealth during 2010?
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
a 1 Compute depreciation expense for 2010 Rocky 80000 8000 5 yrs 14400 Stone 80000 x 2 x 20 32000 2 Compute the book value of the equipment as of 1231...View the full answer
