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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

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

$20,000

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

$84,000

$88,400

$90,000

$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?

May 21 2020 View more View Less

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