Question

Requirement 1: As part of the live session prep homework, you researched a company’s 10K to discover information about their inventory. In this homework requirement, you will add to that research by identifying a 2nd company in the same or similar industry and prepare a side by side analysis of each company’s inventory. Your analysis should include 2 columns, the previous company you researched and a new column for the 2nd company. (You can also choose 2 new companies in the same industry if preferred). Your side by side analysis should include the following: Company A (done for live session) Company B (added now) Name of Company 10K Link Total $ amount of Inventory Current Year Inventory expressed as a % of Total Assets Average Days Outstanding for Inventory FIFO, LIFO, or AC? Any other interesting footnote items? Comment in a few sentences on the similarities and/or differences regarding inventory at your two companies.

Requirement 2:

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

Requirement 1 : Information based on research is needed to Answer this requirement

Requirement 2 :  

All the expenses which are incurred to bring the asset to its location and in its working condition needs to be capitalized.

                             Statement Showing Asset Capitalization with Reasons

Particulars	Amount	Reasons
Original Cost of Equipment	980000	Cost of Equipment
Add: Transportation and Insurance Cost	25000	Necessary for bringing the asset to its location
Service and Warranty Cost	1800/Year	Not to be Capitalized Since it is taken Additionally and not an Embedded Warranty Expense
Total Amount Capitalized in Books	1005000

   Statement Showing Calculation of rates/Amount of depreciation

Straight Line Method (Amount)	Double Declining balance method(Rate
(Original Cost-Salvage)/Useful life =(1005000-82000)/5 = 184600/Year	Straight line method rate *2 = 1/5*2 = 40%

                 Statement Showing Depreciation Schedules for 5 years

Years	Straight Line Method	Double Declining balance method
1	184600	1005000*0.4 = 402000
2	184600	(1005000-402000)*0.40 = 241200
3	184600	(1005000-402000-241200)*0.40 = 144720
4	184600	(1005000-402000-241200-144720)*0.40 = 86832
5	184600	1005000-402000-241200-144720-86832-82000(Salvage) = 48248
Total Depreciation	923000	923000

Report to Management : Although both methods Provides Same amount of depreciation in their overall Useful lives. The difference between the two is that Double declining Balance method , Depreciation is Faster in early years and slower in later years as comparing to SLM , which results is Same Depreciation every year. In Year 1, DDB Provides for 217400(402000-184600) incremental depreciation ,which results in reduction of income to the extent of that, Also in year2 , it provides for 56600 Incremental Depreciation.,resulting in fall in Income Statement. The choice of Method depends upon the Matching Concept of Revenue with Expenses in the Income Statement.