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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: 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: If a business has a significant investment in depreciable assets, the expected life and residual value estimates can materially affect depreciation expense and therefore net income. What might motivate management to use the highest or lowest estimates? How would cash outflows for income taxes be affected by the estimates?

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
Publisher: Cengage Learning
ISBN: 9781337690881
BuyFind

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
Publisher: Cengage Learning
ISBN: 9781337690881

Solutions

Chapter
Section
Chapter 7, Problem 79.3C
Textbook Problem

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 79.3C, 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:

If a business has a significant investment in depreciable assets, the expected life and residual value estimates can materially affect depreciation expense and therefore net income. What might motivate management to use the highest or lowest estimates? How would cash outflows for income taxes be affected by the estimates?

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Chapter 7 Solutions

Cornerstones of Financial Accounting
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