Chapter 11: Q14Q (page 583)
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.
Answer
No, depreciation does not provide cash; revenues do.
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Question: Hayes Company sold 10,000 shares of Kenyon Co. commonstock for \(27.50 per share, incurring \)1,770 in brokeragecommissions. These securities originally cost $260,000.Prepare the entry to record the sale of these securities.
(Depreciation Choice—Ethics) Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.
Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of \(2,000,000 and a fair value of \)2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.”
Instructions
Answer the following questions.
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.
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.
McDonald’s Corporation
McDonald’s is the largest and best-known global food-service retailer, with more than 32,000 restaurants in 118 countries. On any day, McDonald’s serves approximately 1 percent of the world’s population. The following is information related to McDonald’s property and equipment.
McDonald’s Corporation Summary of Significant Accounting Policies Section |
Property and Equipment. Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives: buildings—up to 40years; leasehold improvements—the lesser of useful lives of assets or lease terms, which generally include option periods; and equipment—three to 12 years. [In the notes to the financial statements:] Property and Equipment Net property and equipment consisted of: December 31 (In millions) 2014 2013 Land \( 5,788.4 \)5,849.3 Buildings and improvements on owned land 14,322.4 14,715.6 Buildings and improvements on leased land 13,284.0 13,825.2 Equipment, signs and seating 5,113.8 5,376.8 Other 617.5 588.7 39,126.1 40,355.6 Accumulated depreciation and amortization (14,568.6) (14,608.3) Net property and equipment \(24,557.5 \)25,747.3 Depreciation and amortization expense for property and equipment was (in millions): 2014—\(1,539.3; 2013—\)1,498.8; 2012—\(1,402.2. [In its 6-year summary, McDonald’s provides the following information.] (in millions) 2014 2012 2013 Cash provided by operations \)6,370 \(7,121 \)6,966 Capital expenditures 2,583 2,825 3,049 |
Instructions
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