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Chapter 11: Q3Q (page 582)

Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree? Explain.

Short Answer

Expert verified

Answer

I disagree with the statement.

Step by step solution

01

Meaning of Depreciation

Depreciation is an annual indirect and explicit expense imposed by a corporationwhen it utilizes a fixed asset like equipment, machinery, or pricey tools. Essentially, it refers to the decrease in the value of a tangible asset.

02

Explaining the statement 

Disagree. Accounting depreciation is the practice of assigning the cost of tangible assets to expenses in a systematic and sensible manner to the periods in which the asset is expected to be used. As a result, depreciation is a cost-allocation tool rather than a valuation tool.

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Most popular questions from this chapter

What is a modified accelerated cost recovery system (MACRS)? Speculate as to why this system is now required for tax purposes.

(Depreciation—Change in Estimate) Machinery purchased for \(60,000 by Tom Brady Co. in 2013 was originally estimated to have a life of 8 years with a salvage value of \)4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2018, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.

Instructions

  1. Prepare the entry to correct the prior years’ depreciation, if necessary.
  2. Prepare the entry to record depreciation for 2018.

(Depreciation Computations—Five Methods) Jon Seceda Furnace Corp. purchased machinery for \(315,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, salvage value of \)15,000, production of 240,000 units, and working hours of 25,000. During 2018, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.

Instructions

From the information given, compute the depreciation charge for 2018 under each of the following methods. (Round to the nearest dollar.)

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. Sum-of-the-years’-digits.
  5. Declining-balance (use 20% as the annual rate)

Toro Co. has equipment with a carrying amount of \(700,000. The expected future net cash flows from the equipment are \)705,000, and its fair value is $590,000. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?

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.
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