Question

Sanchez Metal Products Company had the following balances, among others, at the end of December 20X1: Cash, $300,000; Equipment, at cost $400,000; Accumulated Depreciation, $100,000. Total revenues (all in cash) were $950,000. All operating expenses except depreciation were for cash and totaled $600,000. Straight-line depreciation expense was $60,000.
Depreciation expense would have been $100,000 if Sanchez had used accelerated depreciation.
1. Assume zero income taxes. Fill in the first two columns of blanks in the accompanying table. Show the amounts in thousands.


2. Fill in the last two columns of blanks in the table above. Assume an income tax rate of 40%. Assume also that Sanchez uses the same depreciation method for reporting to shareholders and to income tax authorities.
3. Compare your answers to requirements 1 and 2. Does depreciation provide cash? Explain as precisely as possible.
4. Refer to requirement 2. Assume that Sanchez had used straight-line depreciation for reporting to shareholders and to income tax authorities. Indicate the change (increase or decrease and amount) in the following balances if Sanchez had used accelerated depreciation for shareholder and tax reporting instead of straight-line: Cash, Accumulated Depreciation, Pretax Income, Income Tax Expense, and Retained Earnings.
5. Refer to requirement 1 where there are zero taxes. Suppose depreciation was doubled under both straight-line and accelerated methods. How would this affect cash? Bespecific.


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  • CreatedFebruary 20, 2015
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