Question - Decision-Making Across the Organization
Pinson Company and Estes Company are two proprietorships that are similar in many respects. One difference is that Pinson Company uses the straight-line method and Estes Company uses the declining-balance method at double the straight-line rate. On January 2, 2015, both companies acquired the depreciable assets shown below.
|
Asset
|
Cost
|
Salvage Value
|
Useful Life
|
|
Building
|
$360,000
|
$20,000
|
40 years
|
|
Equipment
|
130,000
|
10,000
|
10 years
|
Including the appropriate depreciation charges, annual net income for the companies in the years 2015, 2016, and 2017 and total income for the 3 years were as follows.
|
|
2015
|
2016
|
2017
|
Total
|
|
Pinson Company
|
$84,000
|
$88,400
|
$90,000
|
$262,400
|
|
Estes Company
|
68,000
|
76,000
|
85,000
|
229,000
|
At December 31, 2017, the balance sheets of the two companies are similar except that Estes Company has more cash than Pinson Company. Lynda Peace is interested in buying one of the companies. She comes to you for advice.
Instructions - With the class divided into groups, answer the following.
(a) Determine the annual and total depreciation recorded by each company during the 3 years.
(b) Assuming that Estes Company also uses the straight-line method of depreciation instead of the declining-balance method as in (a), prepare comparative income data for the 3 years.
(c) Which company should Lynda Peace buy? Why?