Reliable United Nebraska Document Management Company (RUN DMC), provides electronic document management services (scanning, sorting, filing, etc.) to legal and accounting firms in the Great Plains states.
The company was formed on January 1, Year 1, and adopted a December 31 Fiscal Year. Upon formation, three partners contributed $10,000 each and immediately purchased a $25,000 electronic document imaging system with a five year useful life and no salvage value. The partners do not expect to purchase any additional capital equipment during the next three years.
Also upon formation, the three partners/founders of the company each received 100 shares of stock with a $1 Par Value. No further investments are expected to be made in RUN DMC during the first three years. There is no need to borrow money.
The Cost of Goods Sold is solely for direct labor: The partners are the only employees. The partners agree to take 50% of the revenue and split it, as it is received, as payment for the work to be performed (Essentially the Cost of Goods Sold for RUN DMC). Partners are responsible for their own taxes and benefits. All payments are made upon signing of a contract.
Fixed costs represent utilities, supplies and other operational costs which are paid for as used and billed.
As an analytical consultant for RUN DMC, the partners have hired you to create Revenue and Income estimates (E) and determine whether to use the Straight Line or Accelerated (Double Declining Balance - DDB) Depreciation method. You will use the same method for tax filings and income reporting to your co-investors.
Your objective is to determine which method will give generate the highest book value (Shareholders Equity) at the end of three years.
As a first step, you need to determine how the depreciation expense will impact both the balance sheet and income statement for the next three years.