Question

A recent annual report for Naomi reported that the (gross) balance of property, plant, and equipment

at the end of the current year was $16,774 million. At the end of the previous year it was $15,667

million. During the current year, the company bought $2,118 million worth of new equipment. The

balance of accumulated depreciation at the end of the current year was $8,146 million and at the end

of the previous year was $7,654 million. Depreciation expense for the current year was $1,181

million. The annual report does not disclose any gain or loss on the disposition of property, plant,

and equipment, so you may assume the amount was zero.

Required:

a. What was the gross book value of the assets disposed?

b. What amount of proceeds did Naomi receive when it sold property, plant, and equipment?

c. Assume Naomi uses straight-line depreciation and that depreciation expense is calculated based

on the balance of property, plant and equipment at the beginning of the year. What is your

estimate of the average expected life for Naomi depreciable assets at the beginning of the year?

Explain.

d. Given your answer to part c above, what is your estimate of the average age of Naomi’s

depreciable assets at the beginning of the year? Explain.

Answer 1

a. What was the gross book value of the assets disposed?

Answer: Gross Value of Assets disposed = Opening Gross Block + Additions - Closing Gross Block

..................................................................= $15,667 + $2,118 - $16,774

..................................................................= $1,011 million

b. What amount of proceeds did Naomi receive when it sold property, plant, and equipment?

Answer: Accumulated Depreciation on Assets disposed = Opening Depreciation + Depreciation for current year - Closing Depreciation

..........................................................................................= $7,654 + $1,181 - $8,146

..........................................................................................= $689 million

Net book value of assets sold = $1,011 million - $689 million

................................................= $322 million

As in the question it is stated that there was no gain or loss on sale. Hence amount of proceeds would be equal to the net book value of assets sold i.e $322 million

c. Assume Naomi uses straight-line depreciation and that depreciation expense is calculated based

on the balance of property, plant and equipment at the beginning of the year. What is your

estimate of the average expected life for Naomi depreciable assets at the beginning of the year?

Explain.

Answer: Estimated average expected life = ($15,667 / $1,181)

..................................................................= 13.26 years

d. Given your answer to part c above, what is your estimate of the average age of Naomi’s

depreciable assets at the beginning of the year? Explain.

Answer: Estimated average expected life = ($7,654 / $1,181)

..................................................................= 6.48 years