Reimer Company and Lingo Company are two proprietorships that are similar in many respects. One difference is that Reimer Company uses the straight-line method and Lingo Company uses the declining-balance method at double the straight-line rate. On January 2, 2008, both companies acquired the following depreciable assets.
|
Asset
|
Cost
|
Salvage Value
|
Useful Life
|
|
Building
|
$320.000
|
520.000
|
40 years
|
|
Equipment
|
110.000
|
10.000
|
10 years
|
Including the appropriate depreciation charges, annual net income for the companies in the years 2008, 2009, and 2010 and total income for the 3 years were as follows.
|
|
2008
|
2009
|
2010
|
Total
|
|
Reimer Company
|
584.000
|
$88.400
|
$90A)00
|
$262.400
|
|
Lingo Company
|
68,000
|
76.000
|
85.000
|
229.000
|
At December 31, 2010, the balance sheets of the two companies are similar except that Lingo Company has more cash than Reimer Company. Sally Vogts is interested in buying one of the companies. She comes to you for advice.
Instructions
With the class divided into groups, answer the following.
(a) Determine the annual and total depreciation recorded by each company during the 3 years.
(b) Assuming that Lingo Company also uses the straight-line method of depreciation instead of the declining-balance method as in (a), prepare comparative income data for the 3 years.
(c) Which company should Sally Vogts buy?Why?