Question

Three different companies each purchased trucks on January 1, Year 1, for $72,000. Each truck was expected to last four years or 200,000 miles. Salvage value was estimated to be $7,000. All three trucks were driven 67,000 miles in Year 1, 42,000 miles in Year 2, 40,000 miles in Year 3, and 62,000 miles in Year 4. Each of the three companies earned $61,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes.

Required:
a. Calculate the net income for Year 1.
b. Which company will report the highest amount of net income for Year 1

Answer 1

Answer and Explanation:

The computation is shown below;

a.

Particulars Comp A Comp B Comp C

cash revenue $61,000 $61,000 $61,000

Less: depreciation $16,250 $36,000 $21,775

($72,000 - $7000) ÷4] {$72,000 × (25%× 2)] ($72,000 - $7,000) × $67,000 ÷ $200,000)

net income $44750 $25,000 $39225

b. As it can be seen that the net income for the company A is considered to be the highest and the same is to be considered