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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

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.

(Book vs. Tax (MACRS) Depreciation) Shimei Inc. purchased computer equipment on March 1, 2017, for \(31,000. The computer equipment has a useful life of 10 years and a salvage value of \)1,000. For tax purposes, the MACRS class life is 5 years.

Instructions

a. Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in

  1. the financial statements for 2017 and
  2. the tax return for 2017?

b. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in

  1. the financial statements for 2017 and
  2. the tax return for 2017?

c. Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?

(Book vs. Tax (MACRS) Depreciation) Futabatei Enterprises purchased a delivery truck on January 1, 2017, at a cost of \(27,000. The truck has a useful life of 7 years with an estimated salvage value of \)6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2017 and 2018 the company has revenues of \(200,000 and operating expenses (excluding depreciation) of \)130,000.

Instructions

  1. Prepare income statements for 2017 and 2018. (The final amount reported on the income statement should be income before income taxes.)
  2. Compute taxable income for 2017 and 2018.
  3. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
  4. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.

(Depreciation for Partial Periods鈥擲L, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is \(89,000. It is estimated that the machine will have a \)5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.

Instructions Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. 厂耻尘-辞蹿-迟丑别-测别补谤蝉鈥�-诲颈驳颈迟蝉.
  5. Declining-balance (twice the straight-line rate).

(Depreciation Computations鈥擲YD, DDB鈥擯artial Periods) Judds Company purchased a new plant asset on April 1, 2017, at a cost of \(711,000. It was estimated to have a service life of 20 years and a salvage value of \)60,000. Judds鈥� accounting period is the calendar year.

Instructions

  1. Compute the depreciation for this asset for 2017 and 2018 using the sum-of-the-years鈥�-digits method.
  2. Compute the depreciation for this asset for 2017 and 2018 using the double-declining-balance method.
See all solutions

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