Question

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $9,500. The estimated useful life was five years and the residual value was $500. Assume that the estimated productive life of the machine is 10,000 hours. Expected annual production was year 1, 2,200 hours; year 2, 2,300 hours; year 3, 2,400 hours; year 4, 2,100 hours; and year 5, 1,000 hours.

Assume NGS sold the hydrotherapy tub system for $2,850 at the end of year 3.The following amounts were forecast for year 3: Sales Revenues $43,000; Cost of Goods Sold $34,000; Other Operating Expenses $4,300; and Interest Expense $900. Create an income statement for year 3 for each of the different depreciation methods, ending at Income before Income Tax Expense. (Don't forget to include a loss or gain on disposal for each method.).

	NICOLE'S GETAWAY SPA (Forecasted) Income Statement For the Year Ended Year 3 Straight-Line Units-of- Production Double-Declining Balance Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Depreciation Expense Other Operating Expenses Loss (Gain) on Disposal Total Operating Expense Income from Operations Interest Expense Income before Income Tax Expense

Answer 1

NICOLE'S GETAWAY SPA
(Forcasted) Income Statement
For the Year Ended Year 3
	Straight-line	Units of production	Double-declinig balance
Sales Revenue	$43,000	$43,000	$43,000
Less: Cost of Goods Sold	$34,000	$34,000	$34,000
Gross Profit (a)	$9,000	$9,000	$9,000
Less: Operating Expenses:
Depreciatio Expense	$1,800	$2,160	$1,368
Other operating expenses	$4,300	$4,300	$4,300
Loss (Gain) on Disposal	$1,250	$440	($798)
Total Operating Expenses (b)	$7,350	$6,900	$4,870
Income from Operations (a - b)	$1,650	$2,100	$4,130
Less: Interest Expense	$900	$900	$900
Income before income tax expense	$750	$1,200	$3,230

Working notes:

Depreciation under straight line method:
Cost of the asset	$9,500
Less: Residual value	($500)
Depreciable Value (a)	$9,000
Number of years of life (b)	5
Depreciation per each year (a/b)	$1,800
Cost of the asset	$9,500
Less: Accumulated depreciation at the end of third year ($1,800 * 3 years)	($5,400)
Book value at the end of the 3rd year	$4,100
Less: Sale value	($2,850)
Loss on sale of asset under straight line method	$1,250
Depreciation under units of production:
Cost of the asset	$9,500
Less: Residual value	($500)
Depreciable Value (a)	$9,000
Total estimated productive life of the machine in hours (b)	10,000
Depreciable cost per hour (a/b)	$0.90
Depreciation Expense:
First year ($0.90 * 2,200 hours)	$1,980
Second year ($0.90 * 2,300 hours)	$2,070
Third year ($0.90 * 2,400 hours)	$2,160
Cost of the asset	$9,500
Less: Accumulated depreciation at the end of third year ($1,980 + $2,070 + $2,160)	($6,210)
Book value at the end of the 3rd year	$3,290
Less: Sale value	($2,850)
Loss on sale of asset under units of production method	$440
Depreciation under double declining balance method:
Depreciation rate under straight-line method (100%/5 years)	20%
Depreciation rate under double declining balance method (20%* 2) (a)	40%
Cost of the asset (b)	$9,500
Depreciation expense for first year (a * b)	$3,800
Book value at the beginning of second year ($9,500 - $3,800) (c )	$5,700
Depreciation expense for second year (a * c)	$2,280
Book value at the beginning of third year ($5,700 - $2,280) (d )	$3,420
Depreciation expense for third year (a * d)	$1,368
Cost of the asset	$9,500
Less: Accumulated depreciation at the end of third year ($3,800 + $2,280 + $1,368)	($7,448)
Book value at the end of the 3rd year	$2,052
Sale value	$2,850
Profit on sale of asset under double declining balance method ($2,850 - $2,052)	$798