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Depreciation deductions in income tax returns

1A.

Mickey Gillespie is the controller of Print Technologies, a publicly owned company that the company is experiencing financial difficulties and is aggressively looking for ways to cut costs. Suzanne Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life used in computing depreciation on certain special purpose machinery. Bedell believes that this change represents a substantial cost savings, as it will reduce expense on these assets by nearly one half.

Note: The proposed change affects only the deprecation expense recognized in financial statements. Depreciation deductions in income tax returns will not be affected.

Instructions:

1. Discuss the extent to which Bedells idea will, in fact, achieve a cost savings. Consider the effects on both net income and cash flow.

2. Who is responsible for estimating the useful lives of plant assets?

3. Discuss any ethical issues that Gillespie should consider with respect to Bedell's instructions.

1B.

Answer multiple choice test 1-5

CDK Inc.
Trial Balance
December 31
DEBITSCash........................$ 15
Accounts Receivable.........$ 25
Equipment........................$190
Dividends..........................$ 10
Salaries Expense..............$ 85
Depreciation......................$ 25
Supplies Expense..............$ 15
TOTAL............................. $365
CREDITS
Accounts Payable..............$ 20
Capital Stock.....................$105
Retained Earnings...............$ 55
Service Revenue..................$185
TOTAL................................$365

1. What is the balance in income summary before it is closed to retained earnings?
A) 125
B) 50
C) 55
D) 60

2.

Refer to the Trial Balance in Question 1. What is the balance in retained earnings at December 31 after all closing entries have been posted?
A) 105
B) 55
C) 115
D) 60

3. Refer to the Trial Balance in Question 1. What is the total debits on the after-closing trial balance?

A) Some other amount.
B) 230
C) 365
D) 240

4.
Refer to the Trial Balance in Question 1. Which accounts will appear on the balance sheet?

A) retained earnings of $55
B) none of the above
C) dividends of $10
D) net income of $65

5.
Refer to the Trial Balance in Question 1. Which accounts are closed to income summary?

A) Revenue, expenses, and dividends.
B) All accounts
C) All accounts that are not nominal.
D) Revenue and expenses.

1B

Answer multiple test question 1-5

1.

Question #3: What are cash equivalents? Provide two examples. Why are these items often combined with cash for the purpose of a balance sheet presentation?

2.
Question #6: Why are cash balances in excess of those needed to finance business operations viewed as relatively nonproductive assets? Suggest several ways in which these excess cash balances may be utilized effectively.

3.
Question #7: List several principles to be observed by a business in establishing strong internal control over cash receipts.

4.
Question #13: What does the account Unrealized Holding Gain (or Loss) represent? How is this account presented in the financial statements for short-term investments classified as available-for-sale securities?

5.
Question #20: How is the accounts receivable turnover rate computed? Why is this rate significant to short-term creditors?

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1A.

Mickey Gillespie is the controller of Print Technologies, a publicly owned company that the company is experiencing financial difficulties and is aggressively looking for ways to cut costs. Suzanne Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life used in computing depreciation on certain special purpose machinery. Bedell believes that this change represents a substantial cost savings, as it will reduce expense on these assets by nearly one half.

Note: The proposed change affects only the deprecation expense recognized in financial statements. Depreciation deductions in income tax returns will not be affected.

Instructions:

1. Discuss the extent to which Bedells idea will, in fact, achieve a cost savings. Consider the effects on both net income and cash flow.

When we lengthen the time period, the depreciation per year will reduce. The depreciation expense appearing in the income statement will be lower and this will result in a higher net income. There will be no cost savings as such since depreciation is a non cash expense and is only a method to allocate the cost. There will be no impact on the cash flows.

2. Who is responsible for estimating the useful lives of plant assets?

The management of a firm has the discretion to decide the useful life. In this case Bedell as the CEO has the responsibility.

3. Discuss any ethical issues that Gillespie should consider with respect to Bedell’s instructions.

Ethical issue will arise depending on the reason for the change. If the change is due to business reasons, then there should be ...

Solution Summary

Depreciation deductions in income tax returns are examined.

$2.19