Textbook Problem

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?