Question
1) Slow-N-Steady Company and Jackrabbit Company are two firms that are similar in many ways, except that Slow-N-Steady uses the straight-line method for its depreciable
1)Slow-N-Steady Company and Jackrabbit Company are two firms that are similar in many ways, except that Slow-N-Steady uses the straight-line method for its depreciable assets, whereas Jackrabbit uses the declining balance method at double the straight-line rate.On January 1 of Year 1, each firm acquired the following similar, depreciable assets:
Asset
Cost
Salvage Value
Useful Life
Building
$320,000
$20,000
40 years
Equipment
$110,000
$10,000
10 years
Annual net income for the firms (including the appropriate depreciation charges) in Years 1-3 were:
Year 1
Year 2
Year 3
Total
Slow-N-Steady
$84,000
$88,400
$90,000
$262,400
Jackrabbit
$68,000
$76,000
$85,000
$229,000
On December 31 of Year 3, the balance sheets for the two firms are similar, except that Jackrabbit has more cash than Slow-N-Steady.Your client, Anita Chance, is interested in becoming a major shareholder in one of these two firms, and she has come to you for advice.
a)Determine the annual depreciation recorded by each company in Years 1-3, as well as the total depreciation for each firm over the three years.
Depreciation
Year 1
Year 2
Year 3
Total
Slow-N-Steady
Jackrabbit
Computations:
b)Assuming that Jackrabbit Company had also used the straight-line method for depreciation, instead of the declining balance method, recalculate its net income for each year and its total net income over the three years.
Jackrabbit
Year 1
Year 2
Year 3
Total
Declining-balance
Net Income
$68,000
$76,000
$85,000
$229,000
Straight-line Depreciation
Straight-line
Net Income
Computations:
c)What would you tell Ms. Chance about which firm would be the better investment and why you think so?
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