This is a 3-part assignment:
Part 1 Computing Depreciation Expense.
Equipment co
This is a 3-part assignment:
Part 1 Computing Depreciation Expense.
Equipment costing $790,000, with an expected scrap value of $80,000 and an estimated useful life of five years, was purchased on January 1 of the current year.
Required: Calculate the depreciation expense for the first two years of the asset’s useful life using (a) the straight-line method and (b) the double-declining balance method. Which method would you prefer to use for (a) income tax purposes and (b) financial reporting purposes? Why?
Part 2: Capitalize versus Expense.
During the year, NewParts Company retooled its production line in order to accommodate the required changes to auto parts for new car models. The retooling costs were capitalized to NewParts’ balance sheet. Analysts that follow the company suggested that the retooling costs should have been charged against income at the time of purchase rather than capitalized to the company’s balance sheet.
Required
If NewParts Company switched from capitalizing and amortizing the costs of retooling to immediately expensing them, indicate how the following financial statement items would be affected:
1. Revenue (Sales) 4. Assets
2. Operating expenses 5. Liabilities
3. Cash flow from operations
Part 3: Accounting for Short-term Investments (Debt Securities).
The Coolidge Corporation invests excess cash in debt securities until such funds are needed to support operations. At the beginning of the year, the company’s portfolio consisted of the following debt securities:
Company Cost-Basis
Bristol-Myers Squibb (BMS) $ 95,000
Johnson & Johnson (JNJ) 65,000
Pfizer, Inc. (PFE) 120,000
Total $ 280,000
At year-end, the fair values of the three securities were as follows: BMS, $93,000; JNJ, $73,000; and PFE,
$110,000.
Required:
1. (a) Calculate the income statement effect of the company’s debt securities assuming: (a) all securities are classified as trading; (b) all securities are classified as available-for-sale; and (c) BMS and JNJ are classified as trading, while PFE is classified as available-for-sale.
2. (a) Does the classification of a debt security as trading versus available-for-sale affect a company’s reported earnings? Will it affect the value of Coolidge’s share price? Will it affect the amount of income taxes that a company pays to the Internal Revenue Service?
