The condensed balance sheet as of December 31, 2017, for Van Den Boom Enterprises follows:

Sales and operating expenses (other than amortization) are predicted to be $65,000 and $20,000, respectively, for 2018, 2019, and 2020. All sales and operating expenses are received or paid in cash. On January 1, 2018, Van Den Boom pays $40,000 cash for an item.
a. Assume that Van Den Boom Enterprises engaged in operating activities only during 2018, 2019, and 2020. Prepare income statements for 2018, 2019, and 2020 and the balance sheet as of December 31 for 2018, 2019, and 2020, assuming the $40,000 cash payment is treated in each of the following ways:
(1) Immediately expensed.
(2) Capitalized and amortized evenly over two years.
(3) Capitalized and amortized evenly over three years.
b. Compute the total income recognized over the three-year period under each assumption above.
c. What is interesting about the December 31, 2020, balance sheet prepared under all three assumptions?

Transcribed Image Text:

Liabilities and Shareholders' Equity Liabilities Assets Current assets $40,000 $35,000 Shareholders' equity Total liabilities and shareholders' equity Land 55,000 50,000 Total assets $90,000 $90,000