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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(Composite Depreciation) Presented below is information related to LeBron James Manufacturing Corporation.
Asset | Cost | Estimated Salvage | Estimated Life (in years) |
A | \(40,500 | \)5,500 | 10 |
B | 33,600 | 4,800 | 9 |
C | 36,000 | 3,600 | 9 |
D | 19,000 | 1,500 | 7 |
E | 23,500 | 2,500 | 6 |
Instructions
Ortiz purchased a piece of equipment that cost \(202,000 on January 1, 2017. The equipment has the following components.
Component | Cost | Residual Value | Estimated Useful Life |
A | \)70,000 | $7,000 | 10 years |
B | 50,000 | 5,000 | 5 years |
C | 82,000 | 4,000 | 12 years |
Compute the depreciation expense for this equipment at December 31, 2017.
(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.
| Equipment | |||
| 2018 | 2018 | ||
| Jan 1 | Balance 134,750 | June 30 | Cost of 23,000 equipment sold (purchased prior to 2018) |
| Aug. 10 | Purchases 32,000 | ||
| 12 | Freight on Equipment purchased 700 | ||
| 25 | Installation costs 2,700 | ||
| Nov. 10 | Repairs 500 | ||
Instructions
What are the major factors considered in determining what depreciation method to use?
(Depreciation Concepts) As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2017 costs charged to his department. In particular, he is concerned about the line item “depreciation.” Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.
The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2017. Each cost \(625,000, having a salvage value of \)55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.
Instructions
Write a memo dated January 22, 2017, to Phil Perriman to clear up his misunderstanding of the term “depreciation.” Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for double-declining-balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.
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