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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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Straight-Line and Composite Depreciation

Portland Co. uses the straight-line depreciation method for depreciable assets. All assets are depreciated individually, except manufacturing machinery, which is depreciated by the composite method.

During the year, Portland exchanged a delivery truck with Maine Co. for a larger delivery truck. It paid cash equal to 10% of the larger truck’s value.

Required:

  1. 1. Explain the factors that should influence Portland’s selection of the straight-line depreciation method.
  2. 2. Explain how Portland should account for and report the truck exchange transaction.
  3. 3. What benefits should Portland derive from using the composite method rather than the individual basis for manufacturing machinery?
  4. 4. How should Portland calculate the manufacturing machinery’s annual depredation expense in its first year of operation?

1.

To determine

Describe the factors that influence Company P’s selection of the straight line depreciation method.

Explanation

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

The company’s asset’s service potential might have declined by an approximately constant amount each period of its useful life...

2.

To determine

Describe the way in which Company P should account for and report the truck exchange transaction.

3.

To determine

Identify the benefits that the company should derive from the use of composite method rather than the individual basis for manufacturing machinery.

4.

To determine

Describe the way in which Company P computes the annual depreciation expense of manufacturing machinery in its first year of operation.

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