Givenchy and Energy are two businesses that are very similar in many aspects. One difference is the depreciation methods they apply. Givenchy uses the straight-line method while Energy uses the reducing-balance method at double the straight-line rate. On 1 July 2010, both businesses acquired the following depreciable assets.
|
Asset
|
Cost
|
Residual value
|
Useful life
|
|
Building
|
$250 000
|
$20 000
|
40 years
|
|
Equipment
|
125 000
|
10 000
|
10 years
|
Including the appropriate depreciation expenses, annual profit for the businesses in the years 2011, 2012 and 2013 were as follows.
|
|
2011
|
2012
|
2013
|
Total
|
|
Givenchy
|
$80 000
|
$84 000
|
$90 000
|
$254 000
|
|
Energy
|
70 000
|
76 000
|
85 000
|
231 000
|
As at 30 June 2013, the two businesses have similar financial positions except that Energy has more cash than Givenchy. Linda Young is considering investing in one of the businesses andhas come to you for advice.
Required:
1) Reconstruct an extract from the Balance Sheet showing the value of depreciable assets for the year ended 30 June 2012 for Energy.Show all workings (Round the accumulated depreciation to the nearest dollar).
2) Assuming Energy also uses the straight-line method of depreciation, calculate the annual profit for Energy for 2011, 2012 and 2013,showing all workings.
3) Based on the information given and your calculations, explain why Energy has more cash than Givenchy as at 30 June 2013. Has the annual depreciation expense contributed to the business cash flow position? Advise Linda Young which company she should invest in? Justify your answer.