The company experienced the following transactions during 2016.
1. Started business by acquiring $60,000 cash from the issue of common stock.
2. Purchased bakery equipment for $46,000.
3. Had sales in 2016 amounting to $42,000.
4. Paid $8,200 of cash for supplies which were all used during the year to make baked goods.
5. Incurred other operating expenses of $12,000 for 2016.
6. Recorded depreciation assuming the equipment had a four-year life and $6,000 salvage value. The MACRS recovery period is five years.
7. Paid income tax. The rate is 30 percent.
a. Organize the class into three sections and divide each section into groups of three to five students. Assign each section a depreciation method: straight-line, double-declining-balance, or MACRS.
Prepare an income statement and balance sheet using the preceding information and the depreciation method assigned to your group.
b. Have a representative of each section put its income statement on the board. Are there differences in net income? In the amount of income tax paid? How will these differences in the amount of depreciation expense change over the life of the equipment?