XYZ Company\'s net incomes for the past three years are presented below: 2016 $4
ID: 2474769 • Letter: X
Question
XYZ Company's net incomes for the past three years are presented below:
2016 $480,000
2015 $450,000
2014 $360,000
During the 2016 year-end audit, the following items come to your attention: 1. XYZ bought equipment on January 1, 2013 for $392,000 with a $32,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method) 2. During 2016, XYZ changed from the straight-line method of depreciating its cement plant to the double-declining balance method.
The following computations present depreciation on both bases:
2016 2015 2014
Straight-line 36,000 36,000 36,000
Double declining 46,080 57,600 72000
The net income for 2016 was computed using the double-declining balance method, on the January 1, 2016 book value, over the useful life remaining at that time. The depreciation recorded in 2016 was $72,000.
Compute the net income to be reported each year 2014 through 2016.
The answer is
(b) 2014: $360,000 – $45,000 = $315,000.
2015: $450,000 – $45,000 = $405,000.
2016: $480,000 – $45,000 = $435,000.
Could you please explain why they are subtracting 45,000?
Explanation / Answer
Depreciation Expenses = $392,000 - $32,000 = $360,000/6 years = 60,000
2014: $360,000 – $60,000 = $300,000.
2015: $450,000 – $60,000 = $390,000.
2016: $480,000 – $60,000 = $420,000.
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