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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?
Answer
Maximum dividend permissible is the amount of accumulated net income (after depletion) plus the amount of depletion charged.
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(Depreciation Concepts) As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2017 costs charged to his department. In particular, he is concerned about the line item 鈥渄epreciation.鈥� Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.
The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2017. Each cost \(625,000, having a salvage value of \)55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.
Instructions
Write a memo dated January 22, 2017, to Phil Perriman to clear up his misunderstanding of the term 鈥渄epreciation.鈥� Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for double-declining-balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.
Presented below is information related to equipment owned by Pujols Company at December 31, 2017.
Cost (residual value \(0) | \)9,000,000 |
Accumulated depreciation to date | 1,000,000 |
Value-in-use | 5,500,000 |
Fair value less cost of disposal | 4,400,000 |
Assume that Pujols will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.
Instructions
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.
Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Do you agree? Discuss.
(Depreciation Computations鈥擣ive 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.)
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