RUN DMC

Reliable United Nebraska Document Management Company (RUN DMC), provides electronic document management services (scanning, sorting, filing, Jetc.) 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 (Shareholder's 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. Accelerated (DDB) a.) Fill in the blanks (3 points) Straight Line Depreciation Year 1 Depreciation Year 2 Depreciation Year 3 Points 1 1 1 3 Points b.) Fill in the blanks (16 points) Now that you have the depreciation expenses, you need to determine how they will impact the balance sheet and income statement. Use the following assumptions: 1. Initial revenue is expected to be $125,000 with a 40% revenue growth expected year over year through Year 3. 2. All Fixed Costs (except for depreciation) are expected to remain constant at $45,000 per year for the next three years. SLD DDB Year 2 Year 3 Year 2 Year 3 Year 1 S 125,000 Year 1 S 125,000 Revenue OGS G Profit Points 1 1 1 Points 1 1 1 Revenue OGS G Profit 122.500 $ $ 87,500 $ 87,500 S 122.500 45,000 45,000 45,000 45,000 45,000 $ 45,000 Fixed Costs Depreciation Total Op. Expenses 1 Fixed Costs Depreciation Total Op. Expenses 1 S0,000 1 55,000 1 12.500 72.500 S s 73,900 1 Operating Income Theres Net Income 1 1 S 7,875 Operating Income Taxes Net Income 7,665 1 1,575 S 5,925 S 9,8781 1 8 1 8 Points Points Toral 16 At close of business (COB) or the last day of Year 3 (12/31/Year 3), Cask is projected to be $116,775 under the straight line depreciation method, and $112.747 under the Accelerated/DDB method. c.) Calculate the expected Book Value per share* at the end of Year 3 (2 pt) using: Straight Line Depreciation Accelerated Depreciation (DDB) Points 1 1 1 d.) As a result of your calculations, which method yields the highest book value-check one (1 pt): Points Straight Line Depreciation 1 1 Accelerated Depreciation (DDB) Total Points 22 Reliable United Nebraska Document Management Company (RUN DMC), provides electronic document management services (scanning, sorting, filing, Jetc.) 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 (Shareholder's 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. Accelerated (DDB) a.) Fill in the blanks (3 points) Straight Line Depreciation Year 1 Depreciation Year 2 Depreciation Year 3 Points 1 1 1 3 Points b.) Fill in the blanks (16 points) Now that you have the depreciation expenses, you need to determine how they will impact the balance sheet and income statement. Use the following assumptions: 1. Initial revenue is expected to be $125,000 with a 40% revenue growth expected year over year through Year 3. 2. All Fixed Costs (except for depreciation) are expected to remain constant at $45,000 per year for the next three years. SLD DDB Year 2 Year 3 Year 2 Year 3 Year 1 S 125,000 Year 1 S 125,000 Revenue OGS G Profit Points 1 1 1 Points 1 1 1 Revenue OGS G Profit 122.500 $ $ 87,500 $ 87,500 S 122.500 45,000 45,000 45,000 45,000 45,000 $ 45,000 Fixed Costs Depreciation Total Op. Expenses 1 Fixed Costs Depreciation Total Op. Expenses 1 S0,000 1 55,000 1 12.500 72.500 S s 73,900 1 Operating Income Theres Net Income 1 1 S 7,875 Operating Income Taxes Net Income 7,665 1 1,575 S 5,925 S 9,8781 1 8 1 8 Points Points Toral 16 At close of business (COB) or the last day of Year 3 (12/31/Year 3), Cask is projected to be $116,775 under the straight line depreciation method, and $112.747 under the Accelerated/DDB method. c.) Calculate the expected Book Value per share* at the end of Year 3 (2 pt) using: Straight Line Depreciation Accelerated Depreciation (DDB) Points 1 1 1 d.) As a result of your calculations, which method yields the highest book value-check one (1 pt): Points Straight Line Depreciation 1 1 Accelerated Depreciation (DDB) Total Points 22