Suppose you are an investment advisor and are looking at two companies to recommend to your clients, Shelly’s Seashell Enterprises and Jeremy Feigenbaum Systems. The two companies are virtually identical, and both began operations at the beginning of the current year.

In early January, 2014, both companies purchased equipment costing $ 143,000, with a 10-year estimated useful life and a $ 20,000 residual value. Shelly uses the straight- line depreciation method. By contrast, Feigenbaum uses the double- declining- balance method. Both companies’ trial balances at December 31, 2014, included the following:

Sales Revenue .................. $ 270,000

Cost of Goods Sold ...............70,000

Operating Expenses (other than depreciation) ....80,700

Requirements

1. Prepare both companies’ income statements. (Disregard income tax expense.)

2. Write a letter to address the following questions for your clients: Which company appears to be more profitable? Which company would you prefer to invest in? Why?