CASE - PROPERTY,PLANT & EQUIPMENT
The following is a noteaccompanying a financial statement of International Paper Company:Plant, Property, and Equipment
Plant, Properties, and Equipment are stated at cost lessaccumulated depreciation. For financial reporting purposes, thecompany uses the units-of-production method of depreciating itsmajor pulp and paper mills and certain wood products facilities,and the straight-line method for other plans andequipment.
Annual straight-line depreciation rates for financialreporting purposes are as follows:
- Building 2.5 % to 8%
- Machinery and Equipment 5% to 33%
- Woods equipment 10% to 16%For taxpurposes, depreciation is computed utilizing acceleratedmethods.
Required:
1. Are the depreciationmethods used in the company's financial statements by currentincome tax laws? If not, who is responsible for selecting thesemethods?
2. Does the company violate the consistency principle by usingdifferent depreciation methods for its paper mills and woodproducts facilities than it uses for its other plan and equipment?If not, what does the principle of consistency mean? Explain
3. What is the estimated useful life of the machinery and equipmentbeing depreciated with a straight-line deprecation rate of:
i. 5%
ii. 33%
4. Who determines the useful lives over which specific assets areto be depreciated?
5. Why do you think the company uses accelerated depreciationmethods for income tax purposes, rather than using thestraight-line method?PROBLEM -INENTORY
| Boswell Electric prepared the following condensed incomestatements for two successive years:Particulars |
2008(Rs.) |
2007(Rs.) |
| SalesCost of goods soldGross profit on salesOperating expensesNetincome |
200,000150,00050,00030,00020,000 |
160,000100,00060,00020,00040,000 |
At The end of the year 2007, the inventory wasunderstated by Rs. 10,000, but the error was not discovered untilafter the accounts had been closed and financial statementsprepared at the end of the year 2008. The balance sheets for thetwo years showed owner's equity of Rs. 50,000 at the end ofthe year 2007 and Rs. 60,000 at the end of the year 2008. (Boswellis organized as a sole-proprietorship and does not incur incometaxes expense.)
Required:
1. Prepare the corrected income statement for theyear 2007 and 2008
2. What correction, if any, should be made in the amounts of thecompany's owner's equity at the end of the year 2007and 2008?
PROBLEM -DECISION MAKING ABOUT LOAN &LEASECasso limited has anoption to purchase new car for the use from a bank on loan for Rs.100,000 with 16% interest payable annually and the principal isrepayable in full at the end of 4 years. Alternatively, the carcould be leased for 4 years, with the following terms:
- Down payment Rs. 22,000
- Four annual payments Rs. 25,000
- Fair value of the asset Rs. 100,000
- Implicit rate of interest 10%
• Rental is to be paid at the beginning of theyear.
Required:
Find which option is more suitable for the company.