Please refer back to the Scenario homework from last week. In the basic scenario a (no purchase of equipment), we generated the following income statement: Sample Solution to part a

XYZ COMPANY

Income Statement

For the Year Ended December 31,2019

Sales $ 1,000,000

Cost of Goods Sold (Direct Material and Labor) 100,000

Gross profit 900,000

Operating expenses:

Research and development payroll 200,000

Income before income taxes 700,000

Income tax expense (21%) 147,000

Net income $ 553,000

In addition to the facts above, XYZ purchased an expensive super-computer on 1/1/19 for $300,000. The computer has a 5-year life with no residual value. If the computer is depreciated straight-line what is the depreciation expense in year 1?

$300,000 / 5 = $60,000 (depreciation expense in year 1)

In this assignment, you will see that how equipment is used can have drastic effects on the income statement. If equipment is used in manufacturing, the depreciation is included in cost of goods sold. If it is used in R&D, it is immediately expensed if it has no alternative future uses (specialized equipment). If it is used in R&D and has alternative future uses, then it is depreciated and recorded as R&D expense.

	Scenario A - no Equipment	Scenario E -Manufacturing Equipment	F - R&D Specialized Equipment	G - R&D non-future uses
Gross Profit Margin or Ratio	90%
Operating Margin	70%
Profit Margin	55%
Explain (only required if you choose to include in exam)	NA