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Chapter 11: Q11-6IFRS (page 607)
Why might a company choose not to use revaluation accounting?
Answer
The expense involved in revaluing a fixed asset is the primary reason why companies do not use revaluation accounting.
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(Depreciation鈥擟hange 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
Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.
(Depreciation Computation鈥擱eplacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for \(31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was \)200, and \(500 was expended to install it. The machine鈥檚 useful life was estimated at 10 years, with a salvage value of \)2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of \(1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.
On June 1, 2019, the company buys a new machine of greater capacity for \)35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of \(20,000. To prepare the old machine for removal from the plant cost \)75, and expenditures to install the new one were \(1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of \)4,000 at the end of that time. (The exchange has commercial substance.)
Instructions
Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round to the nearest dollar.)
(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
Identify the factors that are relevant in determining the annual depreciation charge, and explain whether these factors are determined objectively or whether they are based on judgment.
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