On January 1, 1979, two corporations are formed to operate merchandising businesses. The firms are alike in all respects except for their methods of accounting. Ruzicka Company chooses the accounting principles that will minimize its reported net income. Murphy Company chooses the accounting principles that will maximize its reported net income but, where different procedures are permitted, will use accounting methods that minimize its taxable income. The following events occur during 1979.

(1) Both companies issue 500,000 shares of \(\$ 1\) par-value common shares for \(\$ 6\) per share on January 2, 1979.

(2) Both firms acquire equipment on January 2, 1979, for \(\$ 1,650,000\) cash. The equipment is estimated to have a 10 -year life and zero salvage value. An investment tax credit of 10 percent is applicable to this equipment.

(3) Both firms engage in extensive sales promotion activities during 1979, incurring costs of \(\$ 400,000\).

(4) The two firms make the following purchases of merchandise inventory.

(5) During the year both firms sell 140,000 units at an average price of \(\$ 15\) each.
(6) Selling, general, and administrative expenses during the year other than advertising total \(\$ 100,000\).
The Ruzicka Company uses the following accounting methods (for both book and tax purposes): LIFO inventory cost-flow assumption. sum-of-the-years'-digits depreciation

method, immediate expensing of the costs of sales promotion, and the deferral method of accounting for the investment credit.
The Murphy Company uses the following accounting methods: FIFO inventory costflow assumption for both book and tax purposes, the straight-line depreciation method for book and the double-declining-balance method for tax purposes, capitalization and amortization of the costs of the sales promotion campaign over 4 years for book and immediate expensing for tax purposes, and the flow-through method of accounting for the investment credit.
a Prepare comparative income statements for the two firms for the year 1979. Include separate computations of income tax expense. The income tax rate is 20 percent of the first \(\$ 25,000\) of taxable income, 22 percent of the next \(\$ 25,000\), and 48 percent of the remainder.
b Prepare comparative balance sheets for the two firms as of December 31, 1979. Both firms have \(\$ 1\) million of outstanding accounts receivable on this date and a single current liability for income taxes payable for the year.
c Prepare comparative statements of changes in financial position for the two firms for the year 1979 .

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Date Units Purchased Unit Price Cost of Purchases January 2 50,000 $6.00 $ 300,000 April 1 60,000 6.20 372,000 August 15 40,000 6.25 250,000 November 30 50,000 6.50 325,000 Total 200,000 $1,247,000