Useful Organizing began operations on January 1,20X3,when the owners invested $80,000 cash in the company.Also on January 1,the company paid for a $30,000 machine.The machine has a useful life of 4 years and a $2,000 residual value.During its first year of operations,the company had sales of $96,000 and operating expenses except depreciation of $67,000.All sales were cash sales and all non-depreciation operating expenses were paid in cash.Useful Organizing has a 30% tax rate and pays all taxes on December 31.What is the cash balance after taxes on December 31,20X3,if Useful Organizing uses double-declining-balance depreciation?
A)$59,800
B)$74,500
C)$74,800
D)$88,800
E)$89,500

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation expense for the machine. Double-declining-balance depreciation means that the company will depreciate the asset twice as fast as the straight-line method. To calculate the annual depreciation expense, we use the following formula:

Depreciation expense = (2 / Useful life in years) x Book value at the beginning of the year

In this case, the book value at the beginning of the year is the cost of the machine minus the accumulated depreciation from the previous year (which is zero since it's the first year of operations).

Year 1 depreciation expense = (2 / 4) x ($30,000 - $0) = $15,000

Now we can calculate the net income for the year:

Sales = $96,000
Operating expenses except depreciation = $67,000
Depreciation expense = $15,000
Net income before taxes = $96,000 - $67,000 - $15,000 = $14,000

The taxes owed for the year are 30% of the net income:

Taxes = 0.3 x $14,000 = $4,200

So the net income after taxes is:

Net income after taxes = $14,000 - $4,200 = $9,800

Finally, we calculate the cash balance at the end of the year:

Cash balance = Cash balance at the beginning of the year + Sales - Operating expenses except depreciation - Depreciation expense - Taxes

Cash balance at the beginning of the year was $80,000, and we already calculated the other values:

Cash balance = $80,000 + $96,000 - $67,000 - $15,000 - $4,200 = $74,800

Therefore, the correct answer is C.

Useful Organizing Began Operations on January 1,20X3,when the Owners Invested