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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Capitalization and Depreciation

Gehl Company purchased significant amounts of new equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Gehl, and placed into operation. Gehl purchased some for cash with discounts available for prompt payments. It purchased some under long-term payment plans, for which the interest charges approximate prevailing rates. In addition, Gehl disposed of some equipment that it had purchased in a prior year. As a result, Gehl is studying its capitalization and depreciation policies.

Required:

  1. 1. What costs should Gehl capitalize for the new equipment purchased this year?
  2. 2. What factors cause the equipment to lose its future economic benefit?
  3. 3. Briefly explain the following:
    1. a. the objective of depreciation accounting (do not discuss specific methods)
    2. b. the factors that should be considered in computing the equipment’s depreciation expense
  4. 4. What theoretical justifications are there for the use of accelerated depreciation methods?
  5. 5. How should Gehl account for and report the disposal of the automobile?

1.

To determine

Identify the cost that should be capitalized by Company G for the current year.

Explanation

Capitalized costs:

Capitalized costs are considered as the part of fixed assets instead of stating them as expenses during the period in which they are incurred and capitalized costs are identified over a period of time through amortization or depreciation of fixed asset.

The expenditure that is necessary to obtain the equipment is treated as capitalized cost. It includes net acquisition of equipment, and the net acquisition cost of equipment is calculated as follows:

Net acqusition cost = [Gross invoice price 

2.

To determine

Identify the factors that would cause the equipment to lose its future economic benefits.

3.

To determine

Explain (a) the objectives of depreciation accounting, and (b) the factors that should be considered in computing the equipment’s depreciation expense.

4.

To determine

Explain the theoretical justification for the use of accelerated depreciation method.

5.

To determine

Explain the manner in which Company G should report the disposal of the automobile.

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