Financial Accounting: An Integrated Statements Approach, 2nd Edition

Electric Energy Sales, GWh*:

Residential $23,947

Nonresidential 58,459

Total GWh sales $82,406**

*Gigawatt-hour

**The difference between generation and sales is caused by line losses

and purchased power.

Duke operated eight coal-fired stations and seven oil and gas combustion turbine stations

with a combined capacity of 7,699 MW (megawatts), three nuclear generating stations with a

combined net capacity of 5,020 MW, 31 hydroelectric stations with a combined capacity of

2,806MW, and seven combustion turbine stations with a combined capacity of 2,424 MW.

The megawatt (MW) rating is the capacity of the unit at a point in time. Translating this

capacity into annual MWh (megawatt-hours) requires multiplying this amount times 24 hours

per day times 340 days in the year (assuming 25 days for repair). A gigawatt is 1,000 megawatts.

a. Determine the utilization of the coal, nuclear, hydro, and oil and gas turbine generation

assets. (Hint:You must translate the megawatt rating into gigawatt-hour capacity for

340 days.)

b. Why are the utilization statistics different across the different generating sources?

c. What percent of total electric sales (in GWh) is nonresidential?

d. Why are operating statistics like this useful to analysts?

Five Points Construction Co. specializes in building replicas of historic houses. Sharon Higgs,

president of Five Points, is considering the purchase of various items of equipment on July 1,

2004, for $120,000. The equipment would have a useful life of five years and no residual value.

In the past, all equipment has been leased. For tax purposes, Sharon is considering depreciating

the equipment by the straight-line method. She discussed the matter with her CPA and learned

that, although the straight-line method could be elected, it was to her advantage to use the mod-

ified accelerated cost recovery system (MACRS) for tax purposes. She asked for your advice as

to which method to use for tax purposes.

a. Compute depreciation for each of the years (2004, 2005, 2006, 2007, 2008, and 2009) of use-

ful life by (a) the straight-line method and (b) MACRS. In using the straight-line method,

one-half year’s depreciation should be computed for 2004 and 2009. Use the MACRS rates

presented in the chapter.

b. Assuming that income before depreciation and income tax is estimated to be $200,000 uni-

formly per year and that the income tax rate is 30%, compute the net income for each of

the years 2004, 2005, 2006, 2007, 2008, and 2009 if (a) the straight-line method is used and

(b) MACRS is used.

c. What factors would you present for Sharon’s consideration in the selection of a deprecia-

tion method?

Lizzie Paulk, CPA, is an assistant to the controller of Insignia Co. In her spare time, Lizzie also

prepares tax returns and performs general accounting services for clients. Frequently, Lizzie per-

forms these services after her normal working hours, using Insignia Co.’s computers and laser

printers. Occasionally, Lizzie’s clients will call her at the office during regular working hours.

Discuss whether Lizzie is performing in a professional manner.

The following is an excerpt from a conversation between the employees of Ermine Co., Jody

Terpin and Hal Graves. Jody is the accounts payable clerk, and Hal is the cashier.

Jody:Hal, could I get your opinion on something?

Hal:Sure, Jody.

436 Chapter 9 Fixed Assets and Intangible Assets

Case 9-6

Effect of depreciation on net

income

Activity 9-1

Ethics and professional

conduct in business

Activity 9-2

Financial vs. tax depreciation

BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES