On January 1, 2013, Goldberg Company purchased a new computer system for $60,000. Management estimates that the system will have a 5-year life and a salvage value of $5,000. Joan Goldberg, the company president, knows that the system can be depreciated using either the straight-line method or the double-declining method. She is concerned as to the possible effect on various financial statement analyses if the company uses one method versus the other.
Required:
a) In 2013 which method will have the larger negative effect (in other words, the less favorable effect) on each of the following ratios:
Debt to equity ratio
Return on sales (net income/sales)
b) In 2016 which method will have the larger negative effect on each of the following ratios
Debt to equity ratio
Return on sales

Question

Quizplus · Accepted Answer

The Answer of On January 1, 2013, Goldberg Company purchased a new computer system for $60,000. Management estimates that the system will have a 5-year life and a salvage value of $5,000. Joan Goldberg, the company president, knows that the system can be depreciated using either the straight-line method or the double-declining method. She is concerned as to the possible effect on various financial statement analyses if the company uses one method versus the other.
Required:
a) In 2013 which method will have the larger negative effect (in other words, the less favorable effect) on each of the following ratios:
Debt to equity ratio
Return on sales (net income/sales)
b) In 2016 which method will have the larger negative effect on each of the following ratios
Debt to equity ratio
Return on sales

On January 1, 2013, Goldberg Company Purchased a New Computer