Question

Marcy Corporation purchased a machine, a depreciable asset, for $100,000. Accounting for depreciable asset involves estimating useful life and salvage value and selecting a depreciation method. Required a. Longer depreciable lives and higher salvage values result in lower depreciation charges. How can the selection of useful life and salvage value affect the financial statements? Discuss. b. Explain the concept of verifiability. Would the useful life and/or amount of salvage value selected be verifiable? Discuss. c. Explain the concept of neutrality. Selection of straight-line method over an accelerated method would result in lower depreciation charges in the earlier years. Would the selection of straight-line over an accelerated method be neutral? Explain. Would it be ethical? Explain.

Answer 1

a. If we select higher salvage value then the depreciable value of an asset i.e. purchase value minus salvage value value will be lower so as the depreciation for every year. Also if we will go for higher depreciable life of the asset the depreciable value will be distributed in more number of years resulting in lower value of depreciation in each financial year. These process will decrease the depreciation expenses in each financial year resulting in incorrect presentation of net profit and higher value of tax in the initial years.

b. Verifibality is required select appropriate life af an asset and an appropriate salvage value after the life of the asset. This gives us a clear picture and confidence over the data we are selecting on charging depreciation and which will provide higher streangth and supportings to the financial statement.

c. Selection of straight line mehod will resulted in equal amount of depreceiation every year over the life of the asset. while in accelerated method the depreciation in the earlier years of the asset will be higher and lower in the later years. Basically the main concept behind this is that the aseet will produce more return in the initial phase of its life and gradually will produce less in the vent of time. Selecting Accelerated method will always show a accurate picture of financial statement while selecting straight line method will give a same amount of depreciation over the years which is not a idea solution. So it is not ethical to go for straight line method by knowing that the nature of asset requires accelerated method of depreciation.