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Chapter 11: Q7Q (page 582)

What basic questions must be answered before the amount of the depreciation charge can be computed?

Short Answer

Expert verified

Answer

The method of depreciation, the useful life of the asset, and the method of cost apportionment must be answered before computing the amount of the depreciation expense

Step by step solution

01

Meaning of Depreciation

Depreciation is an expense incurred on an asset that has become obsolete due to erosion and abrasion.An asset can be depreciated in various ways, which help bring the asset鈥檚 exact value at the time of sale.

02

Explaining the basic questions that must be answered before computing the amount of depreciation charge

Three essential questions must be answered before the amount of depreciation charge can be calculated:

  1. How will the asset's depreciation be calculated?
  2. How long will the item be useful?
  3. What is the optimum technique of cost apportionment for this asset?

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Most popular questions from this chapter

(Depletion Computations鈥擳imber) Forda Lumber Company owns a 7,000-acre tract of timber purchased in 2003 at a cost of \(1,300 per acre. At the time of purchase, the land was estimated to have a value of \)300 per acre without the timber. Forda Lumber Company has not logged this tract since it was purchased. In 2017, Forda had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2017, Forda built 10 miles of roads at a cost of \(7,840 per mile. After the roads were completed, Forda logged and sold 3,500 trees containing 850,000 board feet.

Instructions

  1. Determine the cost of timber sold related to depletion for 2017.
  2. If Forda depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2017.
  3. If Forda plants five seedlings at a cost of \)4 per seedling for each tree cut, how should Forda treat the reforestation?

Explain how gains or losses on impaired assets should be reported in income.

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.

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

Everly Corporation acquires a coal mine at a cost of \(400,000. Intangible development costs total \)100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is \(80,000), after which it can be sold for \)160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.
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