CASE - PROPERTY, PLANT &EQUIPMENT
The following is a note accompanying a financial statement ofInternational 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 and equipment.
Annual straight-line depreciation rates for financial reportingpurposes are as follows:
- Building 2.5 % to 8%
- Machinery and Equipment 5% to 33%
- Woods equipment 10% to 16%
For tax purposes, depreciation is computed utilizing acceleratedmethods.
Required:
1. Are the depreciation methods used in the company'sfinancial statements by current income tax laws? If not, who isresponsible for selecting these methods?
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 andequipment being depreciated with a straight-line deprecation rateof:
i. 5%
ii. 33%
4. Who determines the useful lives over which specific assetsare to 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.)
|
|
Sales
Cost of goods sold
Gross profit on sales
Operating expenses
Net income
|
200,000
150,000
50,000
30,000
20,000
|
160,000
100,000
60,000
20,000
40,000
|
At The end of the year 2007, the inventory was understated byRs. 10,000, but the error was not discovered until after theaccounts had been closed and financial statements prepared at theend of the year 2008. The balance sheets for the two years showedowner's equity of Rs. 50,000 at the end of the year 2007 andRs. 60,000 at the end of the year 2008. (Boswell is organized as asole-proprietorship and does not incur income taxes expense.)
Required:
1. Prepare the corrected income statement for the year 2007 and2008
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?