Exam 8: Property, Plant, and Equipment

A machine was acquired on January 1, 2012 for $4,000,000. At that time it was estimated the machine would last eight years and have a residual value of $560,000. Due to reduced levels of activity during 2014, management revised the estimate of useful life to 10 more years (i.e., the machine was to be operational until December 31, 2023, 12 years in total)and its residual value would be $410,000. The company has a December 31 year-end. Required: Case A: Prepare the journal entries to record depreciation for 2012 and 2014. The company uses straight-line depreciation. Case B: Same as Case A except the company uses the double-declining balance method. The rate used will be 25% for the first two years and then 20% thereafter. Prepare the journal entries to record depreciation for 2012 and 2014.

Explain how the depreciation method should be selected for property, plant and equipment.

What is the meaning of "useful life"?

Discuss how a company can manipulate earnings through estimates used in depreciation.

Listed below are several long-lived assets owned by X Corp. The company uses straight-line depreciation. Assume in all cases that the asset's first and last years are full years, and that all assumptions and estimates used to derive depreciation remain unchanged throughout the assets' useful lives. Required: For each asset, calculate the depreciation expense for the last year of the assets' useful lives. Show your calculations.

What is the effect of overstating 2012 depreciation expense?

What is the meaning of "value in use"?