Comparing Two BusinessesSuppose you created a software package, sold the business, and now...

Comparing Two Businesses

Suppose you created a software package, sold the business, and now are ready to invest in a resort property. Several locations look promising: Monterrey, California; Durango, Colorado; and Mackinac Island, Michigan. Each place has its appeal, but Durango wins out. Two small resorts are available in Durango. The property owners provide the following data:

Income: Income statements for the last year report net income of $500,000 for Gold Rush Resorts and $400,000 for Mountain Hideaway.

Inventories: Gold Rush Resorts uses the FIFO inventory method, and Mountain Hideaway uses LIFO. If Gold Rush had used LIFO, its ending inventory would have been $7,000 lower.

Plant Assets: Gold Rush Resorts uses the straight-line depreciation method and an estimated useful life of 40 years for buildings and 10 years for furniture. Estimated residual values are $400,000 for buildings and $0 for furniture. Gold Rush’s buildings are one-year old. Annual depreciation expense for the buildings is $20,000 and $75,000 per year on the furniture.

Mountain Hideaway uses the double-declining-balance method and depreciates buildings over 30 years. The furniture, also one-year old, is being depreciated over 10 years. First year depreciation expense for the buildings is $100,000 and $180,000 for the furniture.

Accounts Receivable: Gold Rush Resorts uses the direct write-off method for uncollectible receivables. Mountain Hideaway uses the allowance method. The Gold Rush owner estimates that $2,000 of the company’s receivables are doubtful. Mountain Hideaway receivables are already reported at net realizable value.

Requirements

1. To compare the two resorts, convert Gold Rush Resorts’ net income to the accounting methods and the estimated useful lives used by Mountain Hideaway.

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2. Compare the two resorts’ net incomes after you have revised Gold Rush’s figures. Which resort looked better at the outset? Which looks better when they are placed on equal footing?