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Chapter 11: Q11-25Q (page 583)

In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?

Short Answer

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Answer

Maximum dividend permissible is the amount of accumulated net income (after depletion) plus the amount of depletion charged.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Dividends

A dividend is treated as profit, and retained earnings are distributed to shareholders according to their shares. A dividend is given to preferred and common stockholders, but preferred shareholders are given first preference.

02

Explaining maximum permissible net income and its justification.

The amount of cumulative net income (after depletion) plus the amount of depletion charged, is the maximum dividend that can be paid. Companies that plan to harvest natural resources rather than acquire more properties might justify this technique. In fact, such businesses are progressively dispersing their initial capital to investors.

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Most popular questions from this chapter

Jurassic Company owns machinery that cost \(900,000 and has accumulated depreciation of \)380,000. The present value of expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value less cost of disposal of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.

(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.

Equipment
2018
2018
Jan 1Balance 134,750June 30Cost of 23,000 equipment sold (purchased prior to 2018)
Aug. 10Purchases 32,000

12Freight on Equipment purchased 700

25Installation costs 2,700

Nov. 10Repairs 500

Instructions

  1. Prepare any correcting entries necessary.
  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2018 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2018, balance was purchased in 2016.

    a. Straight-line
    b. Sum-of-the-years’-digits.

Francisco Corporation is constructing a new building at a total initial cost of \(10,000,000. The building is expected to have a useful life of 50 years with no residual value. The building’s finished surfaces (e.g., roof cover and floor cover) are 5% of this cost and have a useful life of 20 years. Building services systems (e.g., electric, heating, and plumbing) are 20% of the cost and have a useful life of 25 years. The depreciation in the first year using component depreciation, assuming straight-line depreciation with no residual value, is:

  1. \)200,000.
  2. \(215,000.
  3. \)255,000.
  4. None of the above.

(Depreciation Computations—Four Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was \(117,900. The company estimated that the machine would have a salvage value of \)12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2017.
  2. Activity method for 2017, assuming that machine usage was 800 hours.
  3. Sum-of-the-years’-digits for 2018.
  4. Double-declining balance for 2018.

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the double-declining-balance method. (b) Compute 2017 depreciation expense using the double-declining-balance method, assuming the machinery was purchased on October 1, 2017.
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