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 the selected useful life of the assets is long enough, then the assets cost is divided in large amount of years, so depreciation charged annually is small one and lower expenses charged to Revenues in Financial Statements. If the salvage value is on the higher side, then net depreciable cost of asset got reduced and annually charged depreciation would also be low and lower expenses charged to Revenues in Financial Statements. Thus, the selection of useful life and salvage value will always affects the financial statements.

b. According to the concept of verifiability, the results of accounting period are said to be verifiable, if other accountant produces the same results under the same given assumptions and records. If any outside accountant produces the same depreciation, under provided cost of asset and life period and salvage value. If the accountant does not produces the same results, then it is not verifiable.

The useful life and the amount of salvage value selected can be verifiable if drawn out with the technical and industry norms. Moreover, the useful life and the amount of salvage value are the estimated figures based on past records.

c. As per the concept of neutrality in accounts, the depreciable cost of using an asset would be equally distributed amount the years of the life of the asset impartially and equally. The accountant should act neutrality.

Any asset's efficiency would always be high in the initial years of the useful life of the asset compared to the later part of the asset life. Thus, the accelerated method of depreciation would be a break-through towards providing higher depreciation in the initial years, it will account to neutrality in asset-accounting. Thus, the selection of Straight-line method of depreciation is not according to "the concept of neutrality" because here same amount of depreciation is charged to each year of useful life of asset. So, it is not ethical to use Straight line depreciation method always.