Suppose you are considering investing in two businesses, La Petite France Bakery and Burgers Ahoy Inc. The two companies are virtually identical, and both began operations at the beginning of the current year.

In early January, both companies purchased equipment costing $175,000 that had a 10-year estimated useful life and a $10,000 residual value. La Petite France uses the depreciation method that maximizes income for reporting purposes. In contrast, Burgers Ahoy uses the double-diminishing-balance method for depreciation purposes. Assume that both companies' trial balances at December 31 included the following:

Sales revenue ............................................................................................ $350,000

Cost of goods sold ........................................................................................ 94,000

Operating expenses before depreciation .................................................. 50,000

The income tax rate is 25%.

Requirements

1. Prepare both companies' income statements.

2. Write an investment newsletter to address the following questions for your clients. Which company appears to be more profitable? If prices continue rising over the long term, in which company would you prefer to invest? Why?