Congratulations! High Hopes Incorporated, a new start-upcompany, has just hired you as their new business consultant. HighHopes’ management is faced with making some quick decisions as towhich accounting methods they should use. They have provided youwith the following projected financial information for 2015:
On 1/1/15
Acquire equipment for $40,000 cash. The equipmenthas a 5-year life and a $5,000 salvage value.
During 2015
Purchase inventory:
Date
Number of Units
Unit Price
1/1
100
$115
7/1
150
$110
11/1
110
$100
Total
360
Sell 200 units of inventory at $400each.
Other expenses for the year, excluding depreciation,total $10,000.
They are considering two alternatives for these items:
1. Double-declining balance depreciation and the FIFO periodicinventory method, OR
2. Straight-line depreciation and the LIFO periodic inventorymethod.
It’s your first day on the job. They have asked you to indicatethe impact of these alternative accounting method choices on theirincome statement. Quickly, you dash back to your office and computethe income statement for the first year of operation under eachalternative.
Alternative
1
2
Sales
$ 80,000
$ 80,000
Cost of goods sold
Gross margin
Depreciation expense
Other operating expenses
10,000
10,000
Net income
Recalculate the missing information on the alternative incomestatements and enter the information in the table above. Enterdigits only( no commas or $)
A. During your presentation to High Hopes’ management, you areasked if these alternative accounting methods have any impact onthe balance sheet – if so, what accounts will be affected? What isyour response?
B. High Hopes’ management is concerned that the use of anaccelerated method of depreciation will make their equipment lessvaluable (if they should decide to sell it). What is yourresponse?
C. Finally, High Hopes’ management is also concerned aboutchoosing the proper accounting methods for tax purposes. Do theyneed to use the same depreciation method for tax and bookpurposes?
D. Do they need to use the same inventory method for tax andbook purposes?
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