Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements. Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.
Management might elect to make annual appropriations of retained earnings in contemplation of replacing certain facilities at higher price levels.
The concepts, ideas, principles, guidelines, and rules that accountants use to compile financial statements are known as accounting principles. In addition to defining accounting standards and frameworks, they are also used by standard-setting organizations.
Instead of recording depreciation on replacement costs, management may choose to make yearly disbursements of retained earnings in the event that particular facilities need to be replaced at higher prices. Such allocations might serve to clear up any ambiguities about the amount of money available for dividends, raises in pay, bonuses, or decreased sales prices.
The necessity for these appropriations is addressed in the financial statements' supplemental financial schedules, explanations, and footnotes. (However, depreciation charges and retained profits appropriations do not result in the building of cash for asset replacement.) Profitable activities and proper money management result in the buildup of funds.)
(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.
|Jan 1||Balance 134,750||June 30||Cost of 23,000 equipment sold (purchased prior to 2018)|
|Aug. 10||Purchases 32,000|
|12||Freight on Equipment purchased 700|
|25||Installation costs 2,700|
|Nov. 10||Repairs 500|
(Depletion Computations—Timber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2006 at a cost of $1,400 per acre. At the time of purchase, the land without the timber was valued at $400 per acre. In 2007, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of $84,000. Every year, Stanislaw sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2008, Stanislaw selectively logged and sold 700,000 board feet of timber of the estimated 3,500,000 board feet. In 2009, Stanislaw planted new seedlings to replace the trees cut at a cost of $100,000.
(Impairment) Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Roland’s equipment. Roland’s controller estimates that expected future net cash flows on the equipment will be $6,300,000 and that the fair value of the equipment is $5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation.
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