Question

Three different companies each purchased trucks on January 1, 2018, for $56,000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $4,000. All three trucks were driven 77,000 miles in 2018, 66,000 miles in 2019, 43,000 miles in 2020, and 72,000 miles in 2021. Each of the three companies earned $45,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes. d-1. Calculate the retained earnings on the December 31, 2021, balance sheet

Answer 1

Answer:

1. Company A, Retained earnings = $32,000

2. Company B, Retained earnings = $42.000

3. Company C, Retained earnings = $30,024

Explanation:

Requirement 1

Company A = Straight-line depreciation method

We know, Depreciation expense under straight-line depreciation method = (Purchase value of truck - Salvage value) ÷ useful life.

Depreciation expense = ($56,000 - $4,000) ÷ 4

Depreciation expense = $13,000

We know that under straight-line depreciation method, depreciation expense remains same in each year. That means, 2021 depreciation expense = $13,000

Net Income in 2021 = Total revenue - Depreciation expense (assume there is no other expenses)

Net Income in 2021 = $45,000 - $13,000 = $32,000

Therefore, Retained earnings = Beginning retained earnings of 2021 + net income - dividend. (Assume there is no dividend and beginning retained earnings).

Retained earnings = 0 + $32,000 - 0 = $32,000

Requirement 2

Company B = Double-declining depreciation method

We know, Depreciation expense under straight-line depreciation method = (Purchase value of truck ÷ useful life) × 2.

Depreciation expense = ($56,000 ÷ 4) × 2.

Depreciation expense for 2018 = $28,000

We know that under double-declining depreciation method, depreciation expense changes in each year. Therefore, we have to calculate 2019-2021 depreciation expense.

2019 depreciation expense = ($56,000 - 28,000) × 2/4

2019 depreciation expense = $28,000 × 2/4 = $14,000

Book value of truck = $28,000 - $14,000 = $14,000

2020 depreciation expense = $14,000 × 2/4 = $7,000

2021 depreciation expense = $(14,000 - $7,000) × 2/4 = $3,500.

As it is higher than the salvage value, we have to take $3,000 as depreciation expense for 2021. The calculation has been given below:

Total Accumulated depreciation = $28,000 + $14,000 + $7,000 + $3,500 = $52,500

Cost price = $56,000

Salvage value = $4,000

Therefore, book value = $56,000 - $52,500 = $3,500. It exceeds the salvage value, therefore, we have to deduct 500 to keep the expense same.

Net Income in 2021 = Total revenue - Depreciation expense (assume there is no other expenses)

Net Income in 2021 = $45,000 - $3,000 = $42,000

Therefore, Retained earnings = Beginning retained earnings of 2021 + net income - dividend. (Assume there is no dividend and beginning retained earnings).

Retained earnings = 0 + $42,000 - 0 = $42,000

Requirement 3

Company C = units-of-production depreciation method

We know, Depreciation expense rate under units-of-production depreciation method = (Purchase value of truck - Salvage value) ÷ useful usage.

Depreciation expense rate = ($56,000 - $4,000) ÷ 250,000

Depreciation expense rate = $0.208

Depreciation expense for 2021 = $0.208 × 72,000 miles = $14,976

Net Income in 2021 = Total revenue - Depreciation expense (assume there is no other expenses)

Net Income in 2021 = $45,000 - $14,976 = $30,024

Therefore, Retained earnings = Beginning retained earnings of 2021 + net income - dividend. (Assume there is no dividend and beginning retained earnings).

Retained earnings = 0 + $30,024 - 0 = $30,024