Problem #1 : Depreciation (4 points) Company A and Company B have identical resu
ID: 2460450 • Letter: P
Question
Problem #1 : Depreciation (4 points) Company A and Company B have identical results (e.g. their income statement is exactly the same) with the exception of their depreciation method. Company A uses the straight-line method, while Company B utilizes double declining balance. Assume no prior assets are being depreciated. Company A and B each: January 1, Year 1: Purchase equipment of $100,000. 4 year expected life. Salvage value of $20,000. April 1, Year 2: Purchase a truck for $50,000. 5 year life. No salvage value. What is the difference in Company A and B's Year 1 AND Year 2 net income? Please show your calculations.Explanation / Answer
Answer for question no.1:
Formula for straight line depreciation = Cost of the asset - Salvage value/Life of the asset.
=100000-20000/4
=$20,000
Under double declining method, depreciation will cease when the book value is equal to salvage value.
Hence, the second year depreciation is $50,000 -$20,000 =$30,000.
Answer for question no.2:
Price of the bond is nothing but the present value of the interest payments+Present value of the maturity proceeds.
Five year 10% bond:
$350,000 semi annual interest with effective rate of interest =8% is calculated using financial calculator.
Semi annual interest =$350,000 *10%/2 =$17,500.=pmt
Number of payments =5*2 =10.=n
Discount rate =8%./2 =4% as the interest payment is made semi annual=i
Future value =350,000.
Present value =$378,388.14
This is price of the bond, so the bonds are issued at a premium.
5 Years 400,000 bonds with interest payments annually:
Nominal interest rate=5%.
Effective interest rate=8% =i.
Face value of the bonds =400,000.=Future value
Interest payment =$400,000*5% =$20,000 =Pmt
Present value =352,087.48.
Therefore, highest amount of funding is received in the first case, it is generating more cash to the extent of $378,388.14 - 352,087.48.= $26,300.66.
Answer for question no.3:
Face value of the bond =$500,000
Interest on bonds=10%
Years to maturity =10.
Amount received on issue =($500,000/100)*114
=$570,000.
Premium on issue of bonds =$70,000.
Market interest rate=8%.
Answer for subpoint.1:
Answer for subpoint 2:
Particulars Company A Company B Purchases 100000 100000 Life of the asset 4 4 Depreciation straight line 20000 Straight line depreciation rate *2 i.e., (1/life of the asset)*2 =(1/4)*2 Depreciation double declining 50000 Difference in net profit 30000 Year2 Depreciation 20000 30000 Difference in net profit 10000Related Questions
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