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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Effect of Estimates of Life and Residual Value on Depreciation Expense

Hattiesburg Manufacturing purchased a new computer-integrated system to manufacture a group of fabricated metal and plastic products. The equipment was purchased from Bessemer Systems at a cost of $550,000. As a basis for determining annual depreciation expense, Hattiesburg’s controller requests estimates of the expected life and residual value for the new equipment. The engineering and production departments submit the following divergent estimates:

Chapter 7, Problem 79.2C, Effect of Estimates of Life and Residual Value on Depreciation Expense Hattiesburg Manufacturing

Before considering depreciation expense for the new equipment, Hattiesburg Manufacturing has net income in the amount of $250,000. Hattiesburg uses the straight-line method of depreciation.

Required:

Ignoring income taxes, what will be the effect on net income of including a full year’s depreciation expense based on the engineering estimates? Based on the production estimates?

To determine

Introduction:

Depreciation means a value which is used by the company by using the assets for the purpose the production. Devaluation is a technique for reallocating the expense of a substantial resource over its helpful life expectancy of it being in movement. Organizations devalue long haul resources for both bookkeeping and expense purposes. Depreciation is expense which reduce the income of the business.

To choose:

What will be effect on net income of including a full year depreciation expense based on engineering estimates? Based on the production estimates?

Explanation

Given information as per question

Cost of machine = $550000

Method − Straight line method

Depreciation as per Engineering Department Estimate

Depreciation =cost of machine +installation cost - scrap valuetotal life of machine

= $550000$9000010=$46000

Effect on the net income (depreciation including the income) = net income − depreciation

= $250000$

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