Question

Homework 5:

Assume you work for the “Life is Good” T Shirt Company. In an effort to keep up with demand, the company has expanded facilities and purchased state of the art equipment to print t-shirts. The new equipment cost $980,000. There were additional expenditures of $25,000 for transportation to the facility and transport insurance. Additionally, a service and warranty policy was signed for the equipment which will cost $1800 a year for the next 5 years. The salvage value for the equipment at the end of its 5 year useful life is $82,000. The company has traditionally used straight line depreciation but they are considering using Double Declining balance methods. For simplicity, assume the purchase was made on Jan 1, 2018.

1) What value should be used to capitalize the new equipment on the balance sheet? Comment in text format on what expenditures you chose to include or exclude in this value and why.

2) Prepare a depreciation schedule for the five years of service life using SL and prepare an alternative schedule using DDB. (Hint: Whatever number you chose to capitalize above in 1) you should be using here as your Historical Cost). You may use excel for this portion.

3) Using the information created in the schedule, prepare a brief summarization to management explaining the two alternatives and the impact the depreciation method choice will have on the Income Statement in year 1 and year 2.

Answer 1

Given that:

Assume you work for the “Life is Good” T Shirt Company. In an effort to keep up with   demand, the company has expanded facilities and purchased state of the art equipment to print t-shirts.