Answer Sheet for Chapter 8
Challenging Issues Under Accrual Accounting: Long-Lived Depreciable Assets – A Closer Look
Discussion Questions
8-1. Some factors determining the estimated useful life of assets might include: a. prior experience the company b. industry norms c. anticipated technological advancements d. the way the asset will be used e. anticipated company growth
An important point that needs to be made during the discussion of this question is that companies are considering the useful life of the asset and not the life of the asset. Companies rarely, if ever, intend to use any asset until it is literally worthless. Usually, the estimated useful life is somewhat shorter than the actual life.
8-2. The definition of residual value or (what is left over( implies that the asset will be scrapped or traded-in for a newer asset once its estimated life is over. In trying to estimate an asset(s residual value, a company actually tries to look into the future and determine what the company will receive for an asset when it is disposed of or traded in on a new purchase. If the company believes there will be a market for the used asset, the company might find out what used assets, like the one being depreciated, are selling for today. That amount could be used as a starting point in the development of the estimate of its asset(s residual value.
If a large piece of machinery is expected to be totally obsolete when the company is finished using it, the estimated residual value may be based on how much the company could expect to get from the scrap metal in the asset. Expected technological advances may lead management to anticipate that machinery may become nothing more than scrap metal well before the asset actually wears out. In this case, the residual value may be estimated as a dollar amount per ton that the company can expect to get when the machinery is replaced.
8-3. The first alternative starts with
Discussion Questions
8-1. Some factors determining the estimated useful life of assets might include: a. prior experience the company b. industry norms c. anticipated technological advancements d. the way the asset will be used e. anticipated company growth
An important point that needs to be made during the discussion of this question is that companies are considering the useful life of the asset and not the life of the asset. Companies rarely, if ever, intend to use any asset until it is literally worthless. Usually, the estimated useful life is somewhat shorter than the actual life.
8-2. The definition of residual value or (what is left over( implies that the asset will be scrapped or traded-in for a newer asset once its estimated life is over. In trying to estimate an asset(s residual value, a company actually tries to look into the future and determine what the company will receive for an asset when it is disposed of or traded in on a new purchase. If the company believes there will be a market for the used asset, the company might find out what used assets, like the one being depreciated, are selling for today. That amount could be used as a starting point in the development of the estimate of its asset(s residual value.
If a large piece of machinery is expected to be totally obsolete when the company is finished using it, the estimated residual value may be based on how much the company could expect to get from the scrap metal in the asset. Expected technological advances may lead management to anticipate that machinery may become nothing more than scrap metal well before the asset actually wears out. In this case, the residual value may be estimated as a dollar amount per ton that the company can expect to get when the machinery is replaced.
8-3. The first alternative starts with