Question

Tory Enterprises pays \(238,400 for equipment that will last five years and have a \)43,600 salvage value. By using the equipment in its operations for five years, the company expects to earn $88,500 annually, after deducting all expenses except depreciation. Prepare a table showing income before depreciation, depreciation expense, and net (pretax) income for each year and for the total five-year period, assuming straight-line depreciation.

Short answer

The net income at the end of 5 years is $49,540.

Step-by-step solution

Computation of depreciation

$$\begin{gathered} \mathrm{Depreciation}=\frac{\mathrm{cost}-\mathrm{salvage}\mathrm{value}}{\mathrm{useful} \mathrm{life}} \\ =\frac{\$238,400-\$43,600}{5\mathrm{years}} \\ =\frac{\$194,800}{5\mathrm{years}} \\ =\$38,960. \end{gathered}$$

Computation of net income

Year	Income before depreciation	Depreciation expenses	Net income
1	$88,500	$38,960	($88,500 - $38,960) $49,540
2	$88,500	$38,960	($88,500 - $38,960) $49,540
3	$88,500	$38,960	($88,500 - $38,960) $49,540
4	$88,500	$38,960	($88,500 - $38,960) $49,540
5	$88,500	$38,960	($88,500 - $38,960) $49,540