AG also owns a building which it bought in 2010 at a cost of $1.3 million. The current market price of the building is $3.0 million. AG management argues that we should not charge depreciation on the building because the asset has appreciated in value, not depreciated. What is your advice to AG? Justify your answer.

AG also owns a building which it bought in 2010 at a cost of $1.3 million. The current market price of the building is $3.0 million. AG management argues that we should not charge depreciation on the building because the asset has appreciated in value, not depreciated. What is your advice to AG? Justify your answer.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter11: Depreciation, Depletion, Impairment, And Disposal

Section: Chapter Questions

Problem 5C: The following two statements concern depreciation: 1. Because our plant was shut down for part of...

See similar textbooks

Similar questions

Tuttle Construction Co. specializes in building replicas of historic houses. Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equipment on July 1, 2014, for 400,000. The equipment would have a useful life of five years and no residual value. In the past, all equipment has been leased. For tax purposes, Tim is considering depreciating the equipment by the straight-line method. He discussed the matter with his CPA and learned that, although the straight-line method could be elected, it was to his advantage to use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. He asked for your advice as to which method to use for tax purposes. 1. Compute depreciation for each of the years (2014, 2015, 2016, 2017, 2018, and 2019) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half years depreciation should be computed for 2014 and 2019. Use the MACRS rates presented in Exhibit 9. 2. Assuming that income before depreciation and income tax is estimated to be 750,000 uniformly per year and that the income tax rate is 40%, compute the net income for each of the years 2014, 2015, 2016, 2017, 2018, and 2019 if (a) the straight-line method is used and (b) MACRS is used. 3. What factors would you present for Tims consideration in the selection of a depreciation method?
Arnold Inc. is considering a new project that requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $121,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.6 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $471,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.6 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are…
Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project’s life, the equipment would have zero salvage value. No change in net operating working capital (NOWC) would be required for the project. Revenues and operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Opportunity cost $100,000 Equipment cost) $65,000 Annual sales revenues $116,000 Annual operating costs $25,000 Tax rate 25.0% Question options: $20,978…
Jabba-Dabba-Doo Inc. renovated its warehouses exactly two years ago at a cost of $3.5 million. The renovations were considered leasehold improvements, so the cost was subject to straight-line depreciation for tax purposes. The firm will not need to renovate the warehouses for another three years (from today). Given that the firm’s marginal tax rate is 35% and required return is 12%, what is the present value of the remaining depreciation tax shields on the leasehold improvement? Ignore the half-year rule, and round your answer to the nearest dollar. Select one: a. $588,449 b. $359,629 c. $513,181 d. $630,069 e. $210,303
Smith Corporation has a building which is being reclassifed from PPE to an investment. The building is now required to be valued at fair value as of the balance sheet date. Smith originally paid $375,000 for the building and the current carrying value is $350,000. External valuations have determined that the building's fair value should be $360,000. Smith's CEO has argued Smith Corporation would never sell the building for less than $425,000. What is the correct fair value and why? Question 10 options: a) $350,000 because that is the carrying value of the building b) $425,000 because that is the minimum sales price Smith would accept c) $360,000 because that is the perspective of the market d) $375,000 because that is the entrance price
In 2014, Nana Company purchased property with natural resources for P12,400,000. The property was relatively close to a large city and had an expected residual value of P3,000,000. However, P1,200,000 will have to be spent to restore the land for use. The following information relates to the use of the property: - In 2014, Nana spent P800,000 in develpment cost and P600,000 in building on the property. Nana does not anticipate that the building will have any utility after the natural resources are depleted. - In 2015 and 2017, P600,000 and P1,600,000 respectively were spent for additional development on the mine - The tonnage mined and estimated remaining tons for years 2014-2018 are as follow: Year Ton Extracted Estimated Tons Remaining 2014 - 5,000,000 2015 1,500,000 3,500,000 2016 1,800,000 2,000,000 2017 1,700,000 900,000 2018 900,000 0 Based on the preceding information, calculate the depletion and depreciation for 2015? Depletion Depreciation a. 3,600,000 180,000 b.…
Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No change in net operating working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Opportunity cost $100,000 Net equipment cost (depreciable basis) $65,000 Straight-line depr. rate for equipment 33.333% Annual sales revenues $128,000 Annual operating costs (excl. depr.) $25,000 Tax rate 35%
Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, the controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company's stock price to go down. Instructions: Answer the following questions: (a) What stakeholder interests are in conflict? (b) What ethical issues does Carter face? (c) How should these costs be allocated?
For specialized devices for use with its latest GPS / GIS system, Freeman Engineering charged $28,500. Using MACRS depreciation, the equipment was depreciated over a 3 year recovery period. After 2 years, the company sold the equipment for $5000 when it bought an improved system. (a) Assess the value of the recapture of depreciation or the capital loss involved in the asset sale. (b) What tax impact is that number going to have?
Your company has to liquidate some equipment that is being replaced. The originally cost of the equipment is $100,000. The firm has deprecated 65% of the original cost. The salvage value of the equipment today is $50,000. The firm has a tax rate of 30%. What is the equipment’s after-tax net salvage value? Please show your work.
Lou Lou and Company purchased a piece of machinery 2 years ago for $50,000 and has depreciation to date of $15,000. The fair market value of the asset is $30,000, but the company believes it can achieve $34,000 in net future cash flows from the asset. Costs to dispose of the asset is $200. Assuming the asset is held for use, determine if the asset is impaired. If so, what is the amount of the write-off? The asset is impaired and Lou Lou should record a $1,000 loss on impairment. The asset is impaired and Lou Lou should record a $5,200 loss on impairment. The asset is NOT impaired. The asset is impaired and Lou Lou should record a $5,000 loss on impairment.
Be-low Mining, Inc., is trying to decide whether it should purchase or lease new earthmoving equipment. If purchased, the equipment will cost $175,000 and will be used 6 years, at which time it can be sold for $72,000. At Year 3, an overhaul costing $20,000 must be performed. The equipment can be leased for $30,000 per year. Be-low will not be responsible for the midlife overhaul if the equipment is leased. If the equipment is purchased, it will be leased to other mining companies when possible; this is expected to yield revenues of $15,000 per year. The annual operating cost regardless of the decision will be approximately equal. What would you recommend if the MARR is 6%?