QUESTIONS
1. Distinguish among depreciation, depletion, and amortization.
2. 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.
3. Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree? Explain.
4. Explain how estimation of service lives can result in unrealistically high carrying values for fixed assets.
5. The plant manager of a manufacturing firm suggested in a conference of the company’s executives that accountants should speed up depreciation on the machinery in the finishing department because improvements were rapidly making those machines obsolete, and a depreciation fund big enough to cover their replacement is needed. Discuss the accounting concept of depreciation and the effect on a business concern of the depreciation recorded for plant assets, paying particular attention to the issues raised by the plant manager.
6. For what reasons are plant assets retired? Define inadequacy, supersession, and obsolescence.
7. What basic questions must be answered before the amount of the depreciation charge can be computed?
8. 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?
9. Silverman Company purchased machinery for $162,000 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of $15,000, production of 84,000 units, and working hours of 42,000. During 2017, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years’-digits, and double-declining-balance methods.
10. What are the major factors considered in determining what depreciation method to use?
11. Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?
12. If Remmers, Inc. uses the composite method and its composite rate is 7.5% per year, what entry should it make when plant assets that originally cost $50,000 and have been used for 10 years are sold for $14,000?
13. A building that was purchased on December 31, 2003, for $2,500,000 was originally estimated to have a life of 50 years with no salvage value at the end of that time. Depreciation has been recorded through 2017. During 2018, an examination of the building by an engineering firm discloses that its estimated useful life is 15 years after 2017.
What should be the amount of depreciation for 2018?
14. 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.
15. Andrea Torbert purchased a computer for $8,000 on July 1, 2017. She intends to depreciate it over 4 years using the double-declining-balance method. Salvage value is $1,000. Compute depreciation for 2018.
16. Walkin Inc. is considering the write-down of its longterm plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.
17. Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?
18. Toro Co. has equipment with a carrying amount of $700,000. The expected future net cash flows from the equipment are $705,000, and its fair value is $590,000.
The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?
19. Explain how gains or losses on impaired assets should be reported in income.
20. It has been suggested that plant and equipment could be replaced more quickly if depreciation rates for income tax and accounting purposes were substantially increased. As a result, business operations would receive the benefit of more modern and more efficient plant facilities. Discuss the merits of this proposition.
21. Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements. Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.
22. List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.
23. Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?
24. In what way may the use of percentage depletion violate sound accounting theory?
25. In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?
26. The following statement appeared in a financial magazine: “RRA—or Rah-Rah, as it’s sometimes dubbed— has kicked up quite a storm. Oil companies, for example, are convinced that the approach is misleading.
Major accounting firms agree.” What is RRA? Why might oil companies believe that this approach is misleading?
27. Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under fullcost,
Shumway Oil would have reported retained earnings of $42 million and net income of $4 million.
Under successful-efforts, retained earnings were $29 million, and net income was $3 million. Explain the difference between full-costing and successful-efforts accounting.
28. Wal-Mart Stores, Inc. in 2014 reported net income of $16.4 billion, net sales of $482.2 billion, and average total assets of $204.2 billion. What is Wal-Mart’s asset turnover? What is Wal-Mart’s return on assets?
*29. What is a modified accelerated cost recovery system (MACRS)? Speculate as to why this system is now required for tax purposes.
