Question

Required information [The following information applies to the questions displayed below] Three different companies each purchased trucks on January 1, 2018, for $88.000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $6.000. All three trucks were driven 77,000 miles In 2018, 57,000 miles In 2019,52,000 miles In 2020, and 72.000 miles in 2021. Each of the three companies earned $77.000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double- declining-balance depreciation, and company Cuses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes. d-1. Calculate the retained earings on the December 31, 2021, balance sheet? Retained Earnings Company A Company B Company C d-2 which company will report the highest amount of retained earnings on the December 31, 2021, balance sheet? Company A O Company B O Company O All companies have the same retained earnings

Answer 1

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Workings for Question d-1		Note
Purchase cost of trucks	88,000.00	G
Less: Residual Value	6,000.00
Depreciable Cost	82,000.00	A
For Company A
Straight Line Method
Depreciable Value	82,000.00	See A
Life	4.00	B
Annual depreciation	20,500.00	C=A/B
Depreciation for 4 years	82,000.00	D=C*4
Annual cash revenues	77,000.00	E
Cash revenues for 4 years	308,000.00	F=E*4
Retained earnings as on Dec 31,2021
Cash revenues for 4 years	308,000.00	See F
Less: Depreciation for 4 years	82,000.00	See D
Retained earnings as on Dec 31,2021	226,000.00

For Company B				K	See J	L=J*K		This is $ 80,000- Accumulated depreciation.
Double Declining Method			Date	Depreciable amount	Depreciation rate	Depreciation Expense	Accumulated depreciation	Carrying amount
Total cost of Truck	88,000.00	See G	2018	88,000.00	50.00%	44,000.00	44,000.00	44,000.00
Life	4.00	See B	2019	44,000.00	50.00%	22,000.00	66,000.00	22,000.00
Annual depreciation	22,000.00	H=G/B	2020	22,000.00	50.00%	11,000.00	77,000.00	11,000.00
Depreciation rate	25.00%	I=H/G	2021	11,000.00	50.00%	5,000.00	82,000.00	6,000.00
Double Depreciation %	50.00%	J=I*2

Retained earnings as on Dec 31,2021
Cash revenues for 4 years	308,000.00	See F
Less: Depreciation for 4 years	82,000.00	See depreciation table above
Net Income for 4 years	226,000.00	M
Book value of truck on 31st Dec 2021	6,000.00	See depreciation table above
Less: Sale value of truck	6,000.00
Gain on sale of truck	-	N
Retained earnings as on Dec 31,2021	226,000.00	O=M-N

For Company C				R	See Q	S=R*Q		This is $ 80,000- Accumulated depreciation.
Units of Production Method			Date	Miles driven	Depreciable rate	Depreciation Expense	Accumulated depreciation	Carrying amount
Depreciable Value	82,000.00	See A	2018	77,000.00	0.33	25,256.00	25,256.00	62,744.00
Life (miles)	250,000.00	P	2019	57,000.00	0.33	18,696.00	43,952.00	44,048.00
Depreciation per unit	0.33	Q=P/A	2020	52,000.00	0.33	17,056.00	61,008.00	26,992.00
			2021	72,000.00	0.33	20,992.00	82,000.00	6,000.00

Retained earnings as on Dec 31,2021
Cash revenues for 4 years	308,000.00	See F
Less: Depreciation for 4 years	82,000.00	See depreciation table above
Net Income for 4 years	226,000.00	T
Book value of truck on 31st Dec 2021	6,000.00	See depreciation table above
Less: Sale value of truck	6,000.00
Gain on sale of truck	-	U
Retained earnings as on Dec 31,2021	226,000.00	V=T-U

Answer d-2

As we can see that irrespective of the depreciation method used if the trucks are used till their useful life then retained earnings of all there companies will be same.