Chapter 11: Q19 Q (page 583)
Explain how gains or losses on impaired assets should be reported in income.
Answer
Impaired asset losses are reported as part of the income from continuing operations.
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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?
In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?
(Depreciation Basic Concepts) Burnitz Manufacturing Company was organized on January 1, 2017. In 2017, it has used in its reports to management the straight-line method of depreciating its plant assets.
On November 8, you are having a conference with Burnitz’s officers to discuss the depreciation method to be used for income tax and stockholder reporting. James Bryant, president of Burnitz, has suggested the use of a new method, which he feels is more suitable than the straight-line method for the needs of the company during the period of rapid expansion of production and capacity that he foresees. Following is an example in which the proposed method is applied to a fixed asset with an original cost of \(248,000, an estimated useful life of 5 years, and a salvage value of approximately \)8,000.
Year | Year of life used | Fraction rate | Depreciation expense | Accumulated depreciation at the end of year | Book value at the end of Year |
1 | 1 | 1/15 | \(16,000 | \) 16,000 | $232,000 |
2 | 2 | 2/15 | 32,000 | 48,000 | 200,000 |
3 | 3 | 3/15 | 48,000 | 96,000 | 152,000 |
4 | 4 | 4/15 | 64,000 | 160,000 | 88,000 |
5 | 5 | 5/15 | 80,000 | 240,000 | 8,000 |
The president favors the new method because he has heard that:
Instructions
(2) Assume that the Internal Revenue Service accepts the proposed depreciation method in this case. If the proposed method were used for stockholder and tax reporting purposes, how would it affect the availability of cash flows generated by operations?
Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years. (a) Compute 2017 depreciation expense using the straight-line method. (b) Compute 2017 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2017.
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?
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