Question

On January 1, year 1, Jing Company purchased office equipment that cost 15,500 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was1,600. The equipment had a five-year useful life and a 6,000 expected salvage value. Assume that Jing Company earned19,800 cash revenue and incurred 12,500 in cash expenses in year 3. The company uses the straight-line method. The office equipment was sold on December 31, year 3 for9,800. What is the company's net income (loss) for year 3? Hint: Be sure to include depreciation expense for year 3 in your calculation!

1) (1,340)
2) 4,260
3) 4,440
4) 2,740
5) None of the above

Answer 1

Jing Company's net income for year 3 was calculated by subtracting the expenses, depreciation, and loss on sale of equipment from the cash revenue. The net income for the year amounted to $4,440.The correct answer is option 3.

Step-by-step explanation:

To calculate Jing Company's net income for year 3, we need to account for the depreciation expense of the office equipment, the cash revenue and expenses, and the gain or loss from the sale of the equipment.

The calculation of depreciation expense is as follows:

• Cost of the equipment: $15,500
• Transportation cost: $1,600
• Total cost: $15,500 + $1,600 = $17,100
• Expected salvage value: $6,000
• Useful life: 5 years
• Annual Depreciation = (Cost - Salvage value) / Useful life = ($17,100 - $6,000) / 5 = $11,100 / 5 = $2,220

Note that since the equipment is sold at the end of year 3, only 3 years of depreciation are taken.

To calculate the gain or loss from the sale of the equipment:

• Book value of equipment at the end of year 3 = Cost - (Depreciation expense × Years) = $17,100 - ($2,220 × 3) = $17,100 - $6,660 = $10,440
• Sale price of equipment = $9,800
• Loss on sale = Book value - Sale price = $10,440 - $9,800 = $640

Now, let's calculate Jing Company's net income for year 3:

4. Cash Revenue: $19,800
8. Cash Expenses: $12,500
12. Depreciation Expense: $2,220
16. Loss on Sale of Equipment: $640

Net Income for year 3 = Revenue - (Expenses + Depreciation + Loss on Sale) = $19,800 - ($12,500 + $2,220 + $640) = $19,800 - $15,360 = $4,440.

Therefore, the correct answer is Option 3: $4,440.