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Chapter 11: Q11-24Q (page 583)

In what way may the use of percentage depletion violate sound accounting theory?

Short Answer

Expert verified

Answer

In financial statements, the wrong amount of expense will be reported.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depletion

Loss of natural resources as a result of access to them on a regular basis is called depletion.A company uses it when any registered asset is involved, such as oil, coal, or gravel deposits.

02

Explaining the ways in which percentage depletion violates sound accounting theory

Percentage depletion may not always reflect the right percentage of a natural resource's cost to be charged to expenditure for depletion, and it may eventually surpass the property's real cost.

In addition to exceeding the property's real expenses, percentage depletion may not always reflect the right share of a natural resource's expenditures to be charged to expense. As a result, improper amount of spending will be reflected in the financial statements.

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Most popular questions from this chapter

(Depreciation—Conceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years’-digits method, and (3) the double-declining-balance method.

Year

Straight-Line

Sum-of-the Years’-Digits

Double-Declining Balance

1

\( 9,000

\) 15,000

\(20,000

2

9,000

12,000

12,000

3

9,000

9,000

7,200

4

9,000

6,000

4,320

5

9,000

3,000

1,480

Total

\)45,000

\(45,000

\)45,000

Instructions

Answer the following questions.

  1. What is the cost of the asset being depreciated?
  2. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
  3. Which method will produce the highest charge to income in Year 1?
  4. Which method will produce the highest charge to income in Year 4?
  5. Which method will produce the highest book value for the asset at the end of Year 3?
  6. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

What are the major factors considered in determining what depreciation method to use?

(Book vs. Tax (MACRS) Depreciation) Shimei Inc. purchased computer equipment on March 1, 2017, for \(31,000. The computer equipment has a useful life of 10 years and a salvage value of \)1,000. For tax purposes, the MACRS class life is 5 years.

Instructions

a. Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in

  1. the financial statements for 2017 and
  2. the tax return for 2017?

b. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in

  1. the financial statements for 2017 and
  2. the tax return for 2017?

c. Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?

Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?

Explain how estimation of service lives can result in unrealistically high carrying values for fixed assets.
See all solutions

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