On January 1, 2016, Golden Company purchased a new computer
system for $50,000. Management estimates that the system will have
a 5-year life and a salvage value of $7,500. Jane Golden, 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) Determine which method will have the larger negative
effect (in other words, the less favorable effect) on each of the
following ratios in 2016:
Debt to equity ratio
Return on sales (net income/sales)
b) Determine which method will have the larger negative effect on
each of the following ratios in 2018:
Debt to equity ratio
Return on sales
a. Determine which method will have the larger negative effect
(in other words, the less favorable effect) on each of the
following ratios in 2016:
Debt to equity ratio
Return on sales (net income/sales)
(double-declining balance will have the larger negative effect)
b. Determine which method will have the larger negative effect on
each of the following ratios in 2018:
Debt to equity ratio
Return on sales
(straight-line will have the larger negative effect)
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