Ya Wen Corporation’s accumulated depreciation—equipment account increased by $8,750, while $3,250 of patent amortization

Ya Wen Corporation’s accumulated depreciation—equipment account increased by $8,750, while $3,250 of patent amortization was recognized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $18,750 from the sale of investments. Reconcile a net income of $175,000 to net cash flow from operating activities.


Answer:









Net income……………………………………………………………………...…………… $175,000
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation……………………………………………………..…………………… 8,750
Amortization of patents…………………………………..…………………………… 3,250
Gain from sale of investments…………………………….……………………… (18,750)
Net cash flow from operating activities……………………..………………………… $168,250

Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000 that can be sold for $82,000

Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000 that can be sold for $82,000, less a 6% sales commission. Alternatively, the equipment can be leased by Timberlake Company for five years for a total of $84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total $7,950 over the five years. Prepare a differential analysis on March 23, 2014, as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) 

the equipment.

Answer:

Differential Analysis 

Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2) 

March 23, 2014 

 

 

Lease 

Equipment 

(Alternative 1) 

Revenues $84,600 $82,000 –$2,600 

Costs –7,950 –4,920* 3,030 

Income (Loss) $76,650 $77,080 $   430 

    

* $82,000 × 6% 

Timberlake Company should sell the equipment. 

A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date

A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that costs $528,000. The old machine could be sold for $82,000. The annual variable production costs associated with the old machine are estimated to be $167,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $109,000 per year for eight years.

a. Prepare a differential analysis dated September 11, 2014, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

b. What is the sunk cost in this situation?


Answer:

a. Differential Analysis 
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) 
September 11, 2014 
 Continue 
with Old 
Machine 
(Alternative 1) 
Replace 
Old 
Machine 
(Alternative 2) 
Differential 
on Income 
(Alternative 2) 
Revenues:    
Proceeds from sale of old    
machine $ 0 $ 82,000 $ 82,000 
Costs:    
Purchase price 0 –528,000 –528,000 
Variable production costs (8 years) –1,336,0001

–872,0002

Income (Loss) –$1,336,000 –$1,318,000 $ 18,000 
    
$167,000 × 8 years 
$109,000 × 8 years 
The company should replace the old machine. 
b. The sunk cost is the $250,000 book value ($600,000 cost less $350,000 accumulated 
depreciation) of the present machine. The original cost and accumulated depreciation 
were incurred in the past and are irrelevant to the decision to replace the machine.