Question

1. Taylor Venz founded Venz Products on January 1.  During its first year the company had sales of $220,000, a cost of goods sold of $100,000, and operating expenses (not including depreciation) of $50,000.  The company estimates its income taxes expense will be approximately 25% of income before taxes.

The company's equipment, all of which was purchased on January 1, cost $80,000, with an estimated residual value of $5,000, and a useful life of five years.

You have been asked by Taylor Venz to assist in deciding which depreciation method to use in accounting for the Venz Products' activity for its first year ended December 31.

Required:

1. Calculate the Venz Products' net income using the straight-line and double-declining-balance depreciation methods.  Round all calculations to the nearest dollar.

ii.)           What depreciation method would result in more cash available for Venz Products on December 31? How much more additional cash? You must support your answer.

Answer 1

Calculation of Net Income
Particulars	Under Straight line method	Under declining balance depreciation method
	Amount	Amount
Sales	$                       2,20,000.00	$                         2,20,000.00
Less: Cost of goods sold	$                      -1,00,000.00	$                       -1,00,000.00
Less: Operating Expenses	$                         -50,000.00	$                          -50,000.00
Less: Depreciation ( Note 1)	$                         -15,000.00	$                          -30,000.00
Net Profit/(Loss)	$                          55,000.00	$                            40,000.00
Less: Tax @ 25%	$                         -13,750.00	$                          -10,000.00
Profit after tax	$                          41,250.00	$                            30,000.00
Note 1:
Cost of the asset (A)	$                          80,000.00	$                            80,000.00
Residual value (B)	$                             5,000.00	$                              5,000.00
Depreciable Value (A)-(B)	$                          75,000.00	$                            75,000.00
Useful Life (in years)	5	5
Depreciation	$                          15,000.00	$                            30,000.00
	(75,000/5)	200% of Straight line depreciation

Under double double-declining-balance depreciation will be 200% of straight line method. This will result claiming the more depreciation in the initial years and the tax payable will be lower. The additional cash available if the double-declining-balance depreciation method will $ 3,750 ($13,750-$10,000)