At the beginning of the year, Wiggins Co. purchased ten new computers in order to transform an existing café into an Internet café. The following expenditures were related to the purchase of the computers.
• Purchase price, $27,000
• Sales taxes, $2,400
• Freight costs, $1,800
• Installation, $400
The accountant at Wiggins recorded $29,400 in the asset account Equipment and $2,200 in the expense account Delivery Expense. The computers have a three-year life and no salvage value. Wiggins depreciates all fixed assets using the straight-line method.
Required
a. How much depreciation expense will Wiggins record in year one of the computers? Do you agree with this amount? If not, what amount do you think should be recorded as depreciation expense for year one?
b. If income before any expense related to the purchase and depreciation of these computers is $80,000, what will Wiggins report as net income for year one? (Assume a tax rate of 40%.) What amount of income should Wiggins report?
c. Briefly explain to Wiggins' accountant why his net income is incorrect in year one.