Question

points] 2 Financial Statement Impacts [6.5 points) Background: ABC Co recently spent $1,200,000 to acquire a piece of equipment. The accounting staff is unsure how to properly classify and record the purchase. One employee argues that future benefits of the equipment are unknown beyond the current year and that the expenditure should be expensed completely on the current year income statement. Another employee argues that the expenditure will benefit the current year plus two additional years and should be capitalized as a depreciable asset, depreciating it to a $0 salvage value using straight-ine over a 3 year time period. Required: Using the template provided on Blackboard, show the financial statement impacts of these two alteratives over the three year period. Ignore income taxes. You wil not need to use al lines in the template. ACCT 321 CHAPTER 10/11 HANDOUT| PAGE 1

Answer 1

Scenario 1	: - Benefit of the equipment is are unknown beyond the current year
Statement of cash flows		Year 1	Year 2	Year 3
Purchase price of equipment		$1,200,000.00
Income statement
Cost of Equipment purchase		$1,200,000.00
Balance sheet
Assets :
Liabilities :
Note : - Since the employee feel that the benefit derived is unknown beyond the year of purchase the
cost of the equipment should not be capitalized.Entire cost incurred in first year is written off to Income
Statement.

Scenario 2	: - Benefit of the equipment in current year plus 2 additional year
Statement of cash flows		Year 1	Year 2	Year 3
Purchase price of equipment		$1,200,000.00
Income statement
Depreciation charge using straight line method		$400,000.00	$400,000.00	$400,000.00
Balance sheet
Assets :
Fixed Assets
Cost of Equipment		$1,200,000.00	$800,000.00	$400,000.00
Depreciation		-$400,000.00	-$400,000.00	-$400,000.00
Closing balance		$800,000.00	$400,000.00	$0.00
Liabilities :
		0
Note : - Since the employee feel that the benefit is spread over 3 years, the cost of purchase of equipment
is shown in cash flow in first year, asset is capitalized with full cost in first year and depreciation at
straight line method is charged during the 3 years.
The cost of the equipment is completely written off at the 3rd year