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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(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
b. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in
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?
In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of \(8,113 million, end-of-the-year total assets of \)8,323 million, total sales of \(8,268 million, and net income of \)807 million.
(a) Compute Campbell’s asset turnover.
(b) Compute Campbell’s profit margin on sales.
(c) Compute Campbell’s return on assets using
(1) asset turnover and profit margin and
(2) net income. (Round to two decimal places.)
What basic questions must be answered before the amount of the depreciation charge can be computed?
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.
What are the major factors considered in determining what depreciation method to use?
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