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Your family started a new manufacturing business making outdoor benches for use in parks and outdoor venues two years ago. The business has been very successful, and sales are soaring. Because of this success, your family realizes that the equipment purchased to start the business will not last as long as expected because the company has needed to run twenty-four-hour production shifts for most of the past year. There has been a lot of wear and tear on the equipment. The original useful lives and salvage values are not as accurate as your family had hoped. Your aunt, who is the production manager for the family business, has approached you because she is concerned about this issue, and she knows you have had an accounting class. What advice do you have for her? How should the company readjust given the realities of the last few years?

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 11, Problem 5TP
Textbook Problem
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Your family started a new manufacturing business making outdoor benches for use in parks and outdoor venues two years ago. The business has been very successful, and sales are soaring. Because of this success, your family realizes that the equipment purchased to start the business will not last as long as expected because the company has needed to run twenty-four-hour production shifts for most of the past year. There has been a lot of wear and tear on the equipment. The original useful lives and salvage values are not as accurate as your family had hoped. Your aunt, who is the production manager for the family business, has approached you because she is concerned about this issue, and she knows you have had an accounting class. What advice do you have for her? How should the company readjust given the realities of the last few years?

To determine

Introduction:

Salvage or residual value can be defined as the net worth or the value of an asset at which it can be sold or traded in the market at the end of its useful life.

To explain:

The reasons to adjust useful lives and salvage values on new information.

Explanation of Solution

Depreciation is used to assess the useful life of an asset and the residual value of an asset. At times, these estimates might be inaccurate and need to be adjusted on the basis of new information. When the new information is available, the depreciation expense should be recalculated on the basis of new information available. To adjust the remaining depreciable amount, it will be allocated over the new useful life or salvage value of the asset.

For example: Company ABC:

  • ABC has a worth of $60,000.
  • Its salvage value was originally estimated to be $10,000.
  • Its economic life was estimated to be five years.
  • ABC uses straight-line- depreciation method.

After two years, Company ABC finds out that the useful life could have been more accurately estimated at ten years, and the salvage value at that time would be $5,000. The revised depreciation on the basis of new information is calculated as follows:

...
Particulars Amount ($)
Original cost 60,000

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Chapter 11 Solutions

Principles of Accounting Volume 1
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