oints, b-16 Points, e-1,d-1 Points) Reliable United Nebraska Document Management
ID: 2614215 • Letter: O
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oints, b-16 Points, e-1,d-1 Points) Reliable United Nebraska Document Management Company (RUN DMC), provides electronic ment management services (scanning. sorting, filing, etc.) to legal and accounting Great Plains states The company was formed on January 1. Year 1, and adopted a December 31 Fiscal Year. Upor formation, three partners contributed S10,000 each and immediately purchased a $25,000 electronic document imaging system with a five year useful life and no salvage value. The partners do not expect to purchase any additional capital equipment during the next three years. Also upon formation, the three partners/founder s of the company each received 100 shares of stock with a SI Par Value. No further investments are expected to be made in RUN DMC during the three years. There is no need to borrow money The Cost of Goods Sold is solely for direct labor: The partners are the only employees. The partners to take 50% of the revenue and split it, as it is received, as payment for the work to be performed agree Essentially the Cost of Goods Sold for RUN DMC). Partners are responsible for their own taxes and benefits. All payments are made upon signing of a contract. Fixed costs represent utilities, supplies and other operational costs which are paid for as billed. used and As an analytical consultant for RUN DMC, the partners have hired you to create Revenue a estimates (E) and determine whether to use the Straight Line or Accelerated (Double Declining Balance/DDB) Depreciation method. You will use the same method for tax filings and inco reporting to your co-investors. nd Income Your objective is to determine which method will give generate the highest book value (Shareho lder's Equity) at the end of three years. is a first step, you need to determine how the d and income statement for the next three years a.) - Fill in the blanks: Straight Line Accelerated (DDB Depreciation Year I Depreciation Year 2 Depreciation Year 3 Now that you have the depreciation expenses, you need to determine how they will impact the balance sheet and income statement. Use the following assumptions I. Initial revenue is expected to be $125,000 with a 40% revenue growth expected year over year through Year 2. All Fixed Costs (except for depreciation) are expected to remain constant at $45,000 per year for the next three years. 3. The tax rate is 21%, but RUN DMC does not intend to utilize its NOL for the first three years.Explanation / Answer
1. Computation of Depriciation
a. At Straight Line Method
Dep = (Cost-Salvage Value )/Life of Asset
= (25000-0)/5
=$5000 per year
Rate at Straight Line method = 5000/25000 = 20%
b. At DDB Method
Provide depriciation using double rate i.e. 40%
Dep for year 1 = 25000*40% = $10,000
Dep for year 2 = (25000-10000)*40% = $6000
Dep for year 3 = (25000-10000-6000)*40% = $3600
So Dep amounts are
Year Straight Line Acclerated(DDB)
1. $5000 $10000
2. $5000 $6000
3. $5000 $3600
At start there would be $ 25000 of equipment & $5000 cash on Asset side, $ 29700 would be capital balance and $300 ($100*3) would be share capital balance.
The Book Value at begining Would be $30000 ($29700+$300) / 300 = $100 per share.
The Book Value of Stock under straight line method would look like as follows :-
(Amounts in $)
Hence the Book Value of Share using Straight Line method of Dep, at the end of year 3 would be $ 422.58.
The Book Value of Stock under Acclerated (DDB) method would look like as follows :-
(Amount in $)
Hence the Book Value of Share using Acclerated (DDB) method of Dep, at the end of year 3 would be $ 410.47
Since the Book Value of Stock under Straight Line method of Dep. is higher by $ 12.11 (422.58-410.47) it is advisable to use Straight Line Method for Depriciation computation.
Particulars Year 1 Year 2 Year 3 Revenue 1,25,000 1,75,000 2,45,000 - COGS @ 50% 62,500 87,500 1,22,500 - Fixed Cost (Other than Dep.) 45,000 45,000 45,000 Profit Before Dep. and Taxes 17,500 42,500 77,500 - Dep. 5,000 5,000 5,000 Profit Before Tax 12,500 37,500 72,500 -Tax @ 21% 2,625 7,875 15,225 Profit after tax (Trf. to Capital) (a) 9,875 29,625 57,275 Capital Balance at Begining (b) 29,700 39,575 69,200 Closing Capital Balance (c) (a+b) 39,575 69,200 1,26,475 Share Capital Balance (d) 300 300 300 Total Net Worth (e) (c+d) 39,875 69,500 1,26,775 No of Shares (f) 300 300 300 Book Value per Share (e/f) 132.92 231.67 422.58Related Questions
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