Givens Company and Runge Company are two companies that are similar in many respects. One difference is that Givens Company uses the straight-line method, and Runge Company uses the declining-balance method at double the straight-line rate. On January 2, 2015, both companies acquired the following depreciable assets.
Asset Cost Residual Value Useful Life
Buildings............£320,000..............£20,000.........................40 years
Equipment............125,000...............10,000.........................10 years
Including the appropriate depreciation charges, annual net income for the companies in the years 2015, 2016, and 2017 and total income for the 3 years were as follows.
___________________________2015 2016 2017 Total
Givens Company..................£84,000.....£88,400........£90,000........£262,400
Runge Company....................68,000......76,000.........85,000.........229,000
At December 31, 2017, the statements of financial position of the two companies are similar except that Runge Company has more cash than Givens Company.
Linda Yanik 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 Runge 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 Linda Yanik buy? Why?