Sheridan Corporation performs year-end planning in November of each year before

Question

Sheridan Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is $3,360,000. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information.

SHERIDAN CORPORATION
PROJECTED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017

SHERIDAN CORPORATION
SELECTED BALANCE SHEET INFORMATION
AT DECEMBER 31, 2017

Estimated fair value at December 31, 2017:

Security

Cost

Estimated Fair Value

Other information at December 31, 2017:

The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment.

Sheridan explains to Warren that it is important for the corporation to show a $7,840,000 income before taxes because Sheridan receives a $1,120,000 bonus if the income before taxes and bonus reaches $7,840,000. Sheridan also does not want the company to pay more than $3,360,000 in income taxes to the government.

(a) What can Warren do within GAAP to accommodate the president’s wishes to achieve $7,840,000 in income before taxes and bonus? Present the revised income statement based on your decision.

SHERIDAN CORPORATION
PROJECTED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017

Sales $32,474,400 Interest revenue 5,600 Cost of goods sold $15,680,000 Depreciation 2,912,000 Operating expenses 7,168,000 25,760,000 Income before income tax 6,720,000 Income tax 3,360,000 Net income $3,360,000

Explanation / Answer

a. The only option before Warren is to use straight line depreciation instead of the double declining balance method of depreciation for the robotic equipment. The depreciation under SL method would be $ 5,600,000 / 5 = $ 1,120,000 instead of $ 2,240,000.

Sheridan Corporation

Projected Income Statement

For the year ended December 31, 2017

Sales $ 32,474,400 Interest Revenue 5,600 Cost of Goods Sold 15,680,000 Depreciation ( 2,912,000 - 2,240,000 + 1,120,000) 1,792,000 Operating Expenses 7,168,000 Income before Income Tax $ 7,840,000

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