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Chapter 11: Q4Q (page 582)

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

Short Answer

Expert verified

Answer

Charges for depreciation and accumulated depreciation should be reduced.

Step by step solution

01

Meaning of Depletion 

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

02

Explaining the estimation of service lives can result in unrealistically high carrying values for fixed assets 

If the asset's estimated lifetime is excessively extended, the corporation will have to reduce depreciation costs and the accumulated depreciation. Furthermore, the carrying expenses will be high.

The carrying value of an asset is calculated using the formula:

Cost of the asset-Accumulated depreciation.

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Most popular questions from this chapter

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

(Depreciation Computations, SYD) Five Satins Company purchased a piece of equipment at the beginning of 2014. The equipment cost \(430,000. It has an estimated service life of 8 years and an expected salvage value of \)70,000. The sum of-the-years’-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that \(60,000 will be depreciated for a particular calendar year.

Instructions

Show calculations to determine for what particular year the depreciation amount for this asset will be \)60,000.

Workman Company purchased a machine on January 2, 2017, for \(800,000. The machine has an estimated useful life of 5 years and a salvage value of \)100,000. Depreciation was computed by the 150% declining-balance method. What is the amount of accumulated depreciation at the end of December 31, 2018?

(Different Methods of Depreciation) Jackel Industries presents you with the following information.

Description

Date Purchased

Cost

Salvage Value

Life in years

Depreciation Method

Accumulated depreciation to 12/31/18

Depreciation for 2019

Machine A

2/12/17

\(142,500

\)16,000

10

(a)

$33,350

(b)

Machine B

8/15/16

(c)

21,000

5

SL

29,000

(d)

Machine C

7/21/15

75,400

23,500

8

DDB

(e)

(f)

Machine D

10/12/(g)

219,000

69,000

5

SYD

70,000

(h)

Instructions

Complete the table for the year ended December 31, 2019. The company depreciates all assets using the half-year convention.

(Depreciation for Fractional Periods) On March 10, 2019, Lost World Company sells equipment that it purchased for \(192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of \)16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight line method of depreciation.

Instructions

  1. (a) Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, inclusive, under each of the six following assumptions with respect to partial periods.
    1. Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for base and record depreciation through March 9, 2019.)
    2. Depreciation is computed for the full year on the January 1 balance in the asset account.
    3. Depreciation is computed for the full year on the December 31 balance in the asset account.
    4. Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
    5. Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
    6. Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)
  2. (b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.
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