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Accounting Discussion: Depreciation

1-CA11-3
Situation1
The controller's point would be valid if the depreciation method in use during the period of inactivity is the activity method. By this method, depreciation is based on the output produced or input measure. Since during the strike period the equipment was idle, there would then be no output of the equipment or no input to measure at the time and hence nothing to depreciate. However, if any of the other depreciation methods, which are based on functions of time rather of use, are being employed, then the company needs to depreciate the equipment during the strike period.

Situation 11
A)Depreciation determination is based on past experience or experience with similar asset. Since the demand for the blenders is a projection and may fluctuate, the best method to use is the activity method.

B)Factors to be considered by the company in determining the depreciation method are the manner of use: whether fixed or variable. If the use of the blenders would be intermittent , then the activity method would be preferred. If the use of the asset would be a function of time, then the straight-line method would be preferred.

Situation 111
The forth mill should be depreciated along with the rest of the mills in accordance with the method employed up to 2006, despite the under utilization.

2-The method of depreciation method that makes the most sense would be the activity method. Sharapova Company should try to estimate the life of the machine by the amount of blenders the machine can produce over its lifetime. Depreciation cost can be determined every year by taking the amount of blenders produced that year and divide by the total estimated amount of blenders the machine will produce during its estimate

Solution Preview

CA11-3

Situation I. This position relates to the omission of a provision for straight-line depreciation during a strike. The same question could be raised with respect to plant shut-downs for many reasons, such as for a lack of sales or for seasonal business.
The method of depreciation used should be systematic and rational. The annual provision for depreciation should represent a fair estimate of the loss in value arising from wear and usage and also from obsolescence. Each company should analyze its own facts and establish the best method under the circumstances. If the company was employing a straight-line depreciation method, for example, it is inappropriate to stop depreciating the plant asset during the strike.
If the company employs a units-of-production method, however, it would be appropriate not to depreciate the asset during this period. Even in this latter case, however, if the strike were prolonged, it might be desirable to record some depreciation because of the obsolescence factors related to the passage of time.

Situation II.
(a) Steady demand for the new blenders suggests use of the straight-line method or the units-of-production method, either of which will allocate cost evenly over the ...

Solution Summary

The solution goes over a number of situations discussing depreciation.

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