Chapter 11: Q6Q (page 582)
For what reasons are plant assets retired? Define inadequacy, supersession, and obsolescence.
Answer
Assets are retired for one of two reasons: physical factors or economic factors—or a combination of both.
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(Different Methods of Depreciation) Jackel Industries presents you with the following information.
Description | Date Purchased | Cost | Salvage Value | Life in years | Depreciation Method | Accumulated depreciation to 12/31/18 | Depreciation for 2019 |
Machine A | 2/12/17 | \(142,500 | \)16,000 | 10 | (a) | $33,350 | (b) |
Machine B | 8/15/16 | (c) | 21,000 | 5 | SL | 29,000 | (d) |
Machine C | 7/21/15 | 75,400 | 23,500 | 8 | DDB | (e) | (f) |
Machine D | 10/12/(g) | 219,000 | 69,000 | 5 | SYD | 70,000 | (h) |
Instructions
Complete the table for the year ended December 31, 2019. The company depreciates all assets using the half-year convention.
Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.
(Depreciation—Strike, Units-of-Production, Obsolescence) The following are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation.
Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points.
1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production.
2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred.
Instructions
Comment on the appropriateness of the controller’s comments.
Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized machine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant.
Instructions
Situation III: Haley Paper Company operates a 300-ton-per-day kraft pulp mill and four sawmills in Wisconsin. The company is in the process of expanding its pulp mill facilities to a capacity of 1,000 tons per day and plans to replace three of its older, less efficient sawmills with an expanded facility. One of the mills to be replaced did not operate for most of 2017 (current year), and there are no plans to reopen it before the new sawmill facility becomes operational.
In reviewing the depreciation rates and discussing the salvage values of the sawmills that were to be replaced, it was noted that if present depreciation rates were not adjusted, substantial amounts of plant costs on these three mills would not be depreciated by the time the new mill came on stream.
Instructions
What is the proper accounting for the four sawmills at the end of 2017?
Mandall Company constructed a warehouse for \(280,000 on January 2, 2017. Mandall estimates that the warehouse has a useful life of 20 years and no residual value. Construction records indicate that \)40,000 of the cost of the warehouse relates to its heating, ventilation, and air conditioning (HVAC) system, which has an estimated useful life of only 10 years. What is the first year of depreciation expense using straightline component depreciation under IFRS?
(a) \(28,000. (c) \)16,000.
(b) \(14,000. (d) \)4,000.
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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