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
<em>Company A</em> = 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
<em>Company B</em> = 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 <em>$3,000 as depreciation expense for 2021</em>. 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
<em>Company C</em> = 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
