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?