Problem 12-93A Accounting Alternatives and Financial Analysis

Lemon Automobiles has asked your bank for a $100,000 loan to expand its sales facility. Lemon provides you with the following data:

2013 2012 2011

Sales revenue $6,100,000 $5,800,000 $5,400,000

Net income 119,000 112,000 106,000

Ending inventory (FIFO)* 665,000 600,000 500,000

Purchases 5,370,000 5,105,000 4,860,000

Depreciable assets 1,240,000 1,150,000 1,090,000

* The 2010 ending inventory was $470,000 (FIFO).

Your inspection of the financial statements of other automobiles sales firms indicates that most of these firms adopted the LIFO method in the late 1970s. You further note that Lemon has used 5% of depreciable asset cost when computing depreciation expense and that other automobile dealers use 10%. Assume that Lemon's effective tax rate is 25% of income before tax. Also assume the following:

2013 2012 2011

Ending inventory (LIFO)* $508,000 $495,000 $480,000

*The 2010 ending inventory was $470,000 (LIFO)*

Required:

2. Compute depreciation expense for Lemon for 20112013, using both 5% and 10% of the cost of depreciable assets.

Depreciation expense

Year 10% 5%

2011 ? ?

2012 ? ?

2013 ? ?

3. Recompute Lemon's net income for 20112013, using LIFO and 10% depreciation. (Don't forget the tax impact of the increases in cost of goods sold and depreciation expense.)

Net income

2011 ?

2012 ?

2013 ?