Sweet’s Bakery makes cakes, pies, and other pastries that it sells to local grocery stores. The company experienced the following transactions during 2008.

1. Started business by acquiring \($60,000\) cash from the issue of common stock.

2. Purchased bakery equipment for \($46,000\) .

3. Had sales in 2008 amounting to \($42,000\) .

4. Paid \($8,200\) of cash for supplies which were all used during the year to make baked goods.

5. Incurred other operating expenses of \($12,000\) for 2008.

6. Recorded depreciation assuming the equipment had a four-year life and a \($6,000\) salvage value. The MACRS recovery period is five years.

7. Paid income tax. The rate is 30 percent.

Required:

a. Organize the class into three sections and divide each section into groups of three to five students. Assign each section a depreciation method: straight-line, double-declining-balance, or MACRS.

Group Task Prepare an income statement and balance sheet using the preceding information and the depreciation method assigned to your group.

Class Discussion

b. Have a representative of each section put its income statement on the board. Are there differences in net income? In the amount of income tax paid? How will these differences in the amount of depreciation expense change over the life of the equipment?