01 May IS THE PREFERRED STOCK CUMULATIVE OR NONCUMULATIVE?
On January 9, 2010, Swifty Delivery Service purchased a truck at cost of $67,000. Before placing the truck in service, Swifty spent $2,200 painting it, $500 replacing tires, and $5,000 overhauling the engine. The truck should remain in service for 6 years and have a residual value of $14,700. The trucks annual mileage is expected to be 15,000 miles in each of the first 4 years and 10,000 miles in each of the next 2 years–80,000 miles in total. In deciding, which depreciation method to use, Jerry Speers, the general manager, requests a depreciation schedule for each of the depreciation methods (straight line, units of production, and double declining balance).
Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation , and asset book value.
2. Swifty prepares financial statements using the depreciation method that reports the hightest net income in the early years of asset use. For income tax purposes, the company uses the depreciation method that minimizes income taxes in the early years. Consider the first year that Swifty uses the truck. Identify the depreciation methods that meet the general managers objectives, assuming the income tax authorities permit the use of any of the methods.
P10A-9B
Calculating present value
Axel needs new manufacturing equipment. Two companies can provide similar equipment but under different payment plans:
Plan A: MRE offers to let Axel pay $55,000 each year for five years. The payments include interest at 12% per year.
Plan B: Westernhome will let Axel make a single payment of $425,000 at the end of five years. This payment includes both principal and interest at 12%.
Requirements:
1. Calculate the present value of Plan A.
2. Calculate the present value of Plan B.
3. Axel will purchase the equipment that costs the least, as measured by present value. Which equipment should Axel select? Why?
P11-29A
The balance sheet of Ballcraft, Inc., reported the following:
Preferred stock, $6 par, 6%
5,000 shares authorized and issued . $30,000
Common stock, $4.00 par value, 45,000 shares authorized;
10,000 shares issued .. $40,000
Additional paid-in-capital-common $219,000
Total paid-in-capital .. $289,000
Retained earnings . $90,000
Total stockholders equity .. $379,000
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