Demonstration Problem and solution for Chapter 6

# Demonstration Problem and solution for Chapter 6 -...

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Demonstration Problems for Chapter 6 Demonstration Problem 6-1 Alternative Depreciation Methods The following events pertain to Sanders Rental Company (SRC). 1. SRC was started when it issued common stock for \$21,000 cash. 2. On January 1, 2005, SRC paid cash to purchase an automobile. The car dealer gave SRC a \$1,000 cash discount off the \$19,000 list price. However, SRC paid an additional \$2,000 to equip the car with a more luxurious interior so it would have greater appeal to its clientele. Sanders Rental Company expected the car to have a four-year useful life and a \$4,000 salvage value. SRC expected to lease the car for 100,000 miles before disposing of it. 3. SRC leased the car to a customer who drove it 30,000 / 10,000 / 40,000 / 25,000 miles during 2005, 2006, 2007, and 2008, respectively. SRC sold the car on January 1, 2009, for \$4,300 cash. 4. Assume SRC recognized depreciation expense using one of three separate scenarios. The revenue stream and amounts of cash flows assumed for each scenario are shown below: Revenue Stream Scenario 2005 2006 2007 2008 1 \$ 7,200 \$7,200 \$7,200 \$7,200 2 \$13,200 \$8,200 \$4,200 \$3,200 3 \$ 8,000 \$4,800 \$9,600 \$6,400 Use the following depreciation method for each of the scenarios. Scenario Depreciation Method 1 Straight-Line 2 Double-Declining-Balance 3 Units-of-Production Required Prepare income statements, balance sheets, and statements of cash flows for 2005 through 2009 for each of the three scenarios.

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