In reconciling information to complete its financial statements, Flying High Corporation discovered the following situations:

Net income before taxes and the changes
$400,000
Income tax rate
35%
Bad debt expense increased
1% of sales
Sales
$900,000
Equipment original cost
$500,000
Equipment accumulated depreciation
$200,000
Method of depreciation unchanged
DDB
Remaining life changed from 5 years to
3 years

Required: Assuming that no depreciation had been recorded, recompute depreciation expense, bad debt expense, net income before taxes, income tax expense, and net income.

What will be an ideal response?

Answer:
Depreciation Expense:
Cost
$500,000
Less: Accumulated depreciation
(200,000)
Remaining depreciable base
$300,000
Method DDB

Depreciation expense ($300,000 / 3 × 2)
$200,000

Bad Debt Expense:
Sales
$900,000
Additional 1% Bad debt expense
$90,000

Income Tax Expense and Net Income:
Original income before taxes and changes
$400,000
Less: Depreciation
(200,000)
Less: Additional bad dept expense
(90,000)
Updated income before taxes
$110,000
Income Taxes @ 35%
(38,500)
Net Income
$71,500