Pinson Company and Estes Company are two proprietorships that are similar in many respects. One difference is that Pinson Company uses the straight-line method and Estes Company uses the declining-balance method at double the straight-line rate. On January 2, 2018, both companies acquired the depreciable assets shown below.

Including the appropriate depreciation charges, annual net income for the companies in the years 2018, 2019, and 2020 and total income for the 3 years were as follows.

At December 31, 2020, the balance sheets of the two companies are similar except that Estes Company has more cash than Pinson Company. Lynda Peace is interested in buying one of the companies. She comes to you for advice.

Instructions

With the class divided into groups, answer the following.

a. Determine the annual and total depreciation recorded by each company during the 3 years.

b. Assuming that Estes Company also uses the straight-line method of depreciation instead of the declining-balance method as in (a), prepare comparative income data for the 3 years.

c. Which company should Lynda Peace buy? Why?

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Cost Salvage Value Useful Life Asset Buildings $360,000 40 years 10 years $20,000 10,000 Equipment 130,000 2018 Total Total Pinson Company $84,000 $88,400 $90,000 $262,400 Estes Company 68,000 76,000 85,000 229,000 2019 2020