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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 79.3C, 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?

To determine

Introduction:

Depreciation implies an esteem which is utilized by the organization by utilizing the assets for the reason the generation. Debasement is a system for reallocating the cost of a significant asset over its supportive future of it being in development. Associations debase whole deal assets for both accounting and cost purposes. Depreciation is cost which diminish the pay of the business.

To choose:

If business improve the depreciable assets, then what is the treatment on the net income. What might motivate management to use the highest or lowest? How would cash out-flow for income taxes be affected by the estimates?

Explanation

On the off chance that organization improve the current depreciable assets, at that point some different parts will be obtained for the machine and structure the following year depreciation sum additionally increment so the future benefit will be decay and generation will be expanded.

Depreciation and Income Taxes

An organization can pick between the three depreciation techniques talked about befor...

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