Jansing Corporation acquired

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1. On January 2, 2011, Jansing Corporation acquired a new manchine with an estimated useful life of five years. The cost of equipment was $40,000 with a residual value of $5,000.

 

a. Prepare a complete depreciation table under the three depreciation methods listed below. In each case, assume that a full year of depreciation was taken in 2011.

 

1. Straight-line.

 

2. 200 percent declining-balance.

 

3. 150 percent declining balance with a switch to straight-line when it will maximize depreciation expense.

 

b. Comment on significant differences or similarities that you observe among the patterns of depreciation expense recognized under each of these methods.

 

2. A recent annual report of H. J. Heinz Company includes the following note:

 

Depreciation: For financial reporting purposes, depreciation is provided on the straight- line method over the estimated useful lives of the assets, which generally have the following ranges: buildings— 40 years or less; machinery and equipment— 15 years or less; computer software— 3– 7 years; and lease hold improvements— over the life of the lease, not to exceed 15 years. Accel-erated depreciation methods are generally used for income tax purposes.

 

a. Is the company violating the accounting principle of consistency by using different deprecia-tion methods in its financial statements than in its income tax returns? Explain.

 

b. Why do you think that the company uses accelerated depreciation methods in its income tax returns?

 

c. Would the use of accelerated depreciation in the financial statements be more conservative or less conservative than the current practice of using the straight- line method? Explain.

    • 7 years ago
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