## Solutions to Questions and Problems: Using Financial Information

1. The DoeDoe Company purchased an asset for \$2 million. This asset has a salvage value of \$50,000 and is to depreciated over a 15 year life.
1. What is the depreciation expense for the first year of the asset's life using straight-line depreciation? using sum-of-the-years' digits depreciation?

Straight-line depreciation = (\$2,000,000 - 50,000) / 15 = \$130,000

Sum-of-years'-digits depreciation = (15/120) (\$2,000,000 - 50,000) = \$243,750

2. What is the depreciation expense for the last year of the asset's life using straightline depreciation? using sum-of-the-years' digits depreciation?

Straight-line depreciation = (\$2,000,000 - 50,000) / 15 = \$130,000

Sum-of-years'-digits depreciation = (1/120) (\$2,000,000 - 50,000) = \$16,250

2. Which depreciation method provides the greatest net income early in the life of an asset: straight-line or declining balance?

Straight-line depreciation provides the greatest net income in the early years because it yields the lower depreciation (relative to the accelerated methods).

3. Suppose a company has assets of \$5 million and liabilities of \$3 million. What is this company's book value of equity?

Book value of equity = \$5 million - 3 million = \$2 million

4. The Jackson Company has the following amounts recorded:
• common stock of \$2 million
• additional paid-in capital of \$12 million
• retained earnings of \$23 million
• treasury stock of \$3 million
What is the book value of equity for Jackson Company?

Book value of equity (in millions) = \$2 + 12 + 23 - 3 = \$34