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: What is the book value of equity for Jackson Company?

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