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Chapter 11: Q15E (page 587)
Andrea Torbert purchased a computer for \(8,000 on July 1, 2017. She intends to depreciate it over 4 years using the double-declining-balance method. Salvage value is \)1,000. Compute depreciation for 2018.
Depreciation for 2018 = $3,000
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(Depreciation Basic Concepts) Burnitz Manufacturing Company was organized on January 1, 2017. In 2017, it has used in its reports to management the straight-line method of depreciating its plant assets.
On November 8, you are having a conference with Burnitz’s officers to discuss the depreciation method to be used for income tax and stockholder reporting. James Bryant, president of Burnitz, has suggested the use of a new method, which he feels is more suitable than the straight-line method for the needs of the company during the period of rapid expansion of production and capacity that he foresees. Following is an example in which the proposed method is applied to a fixed asset with an original cost of \(248,000, an estimated useful life of 5 years, and a salvage value of approximately \)8,000.
Year | Year of life used | Fraction rate | Depreciation expense | Accumulated depreciation at the end of year | Book value at the end of Year |
1 | 1 | 1/15 | \(16,000 | \) 16,000 | $232,000 |
2 | 2 | 2/15 | 32,000 | 48,000 | 200,000 |
3 | 3 | 3/15 | 48,000 | 96,000 | 152,000 |
4 | 4 | 4/15 | 64,000 | 160,000 | 88,000 |
5 | 5 | 5/15 | 80,000 | 240,000 | 8,000 |
The president favors the new method because he has heard that:
Instructions
(2) Assume that the Internal Revenue Service accepts the proposed depreciation method in this case. If the proposed method were used for stockholder and tax reporting purposes, how would it affect the availability of cash flows generated by operations?
(Depreciation—Strike, Units-of-Production, Obsolescence) The following are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation.
Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points.
1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production.
2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred.
Instructions
Comment on the appropriateness of the controller’s comments.
Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized machine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant.
Instructions
Situation III: Haley Paper Company operates a 300-ton-per-day kraft pulp mill and four sawmills in Wisconsin. The company is in the process of expanding its pulp mill facilities to a capacity of 1,000 tons per day and plans to replace three of its older, less efficient sawmills with an expanded facility. One of the mills to be replaced did not operate for most of 2017 (current year), and there are no plans to reopen it before the new sawmill facility becomes operational.
In reviewing the depreciation rates and discussing the salvage values of the sawmills that were to be replaced, it was noted that if present depreciation rates were not adjusted, substantial amounts of plant costs on these three mills would not be depreciated by the time the new mill came on stream.
Instructions
What is the proper accounting for the four sawmills at the end of 2017?
Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the sum-of-the-years’-digits method. (b) Compute 2017 depreciation expense using the sum-of-the-years’-digits method, assuming the machinery was purchased on April 1, 2017.
Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years.
The following statement appeared in a financial magazine: “RRA—or Rah-Rah, as it’s sometimes dubbed— has kicked up quite a storm. Oil companies, for example, are convinced that the approach is misleading. Major accounting firms agree.” What is RRA? Why might oil companies believe that this approach is misleading?
Question: Hayes Company sold 10,000 shares of Kenyon Co. commonstock for \(27.50 per share, incurring \)1,770 in brokeragecommissions. These securities originally cost $260,000.Prepare the entry to record the sale of these securities.
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