Question

Financial statement effects of depreciation methods Answer the following questions using data from the Campbell Soup Company annual report in the appendix: Required: a. Find the discussion of Property, Plant, and Equipment and depreciation methods used by Campbell's in the appendix. Explain why the particular method is used for the purpose described. What method do you think the company uses for income tax purposes? b. Calculate the ratio of the depreciation and amortization expense for 2017, which is reported in the appendix, in the Consolidated Statements of Cash Flows to the total cost (not net book value) of plant assets reported in the schedule. c. Based on the ratio calculated in part b and the depreciation method being used by Campbell's, what is the average useful life being used for its depreciation calculation? d. Assume that the use of an accelerated depreciation method would have resulted in 25% more accumulated depreciation than reported at July 30, 2017, and that Campbell's Retained Earnings account would have been affected by the entire difference. By what percentage would this have reduced the retained earnings amount reported at July 30, 2017?

Answer 1

1. In this case, Campbell calculates depreciation on the straight-line method for accounting purposes but as per Income tax purpose Depreciation to be calculated on the Written down Value method (WDV). Rate of depreciation is applicable under the Income Tax Act with effect from Assessment year 2003-04 onwards on Written down value method as per rate mentioned in the guideline. Here Building acquired for installation of plant and machinery and the plant is 100 % till AY 17-18 and 40 % AY 2018-19 onwards. Machinery and equipment rate of depreciation is 15 % 20 % and 25 % as per Income tax act. As per companies act Factory Building ( life 25 years) rate is 3.17% and Machinery (Life 15 years) rate is 6.33% in the straight-line method. All the rates are provided as per companies act and Income tax act Campbell should follow the guidelines as per the act
2. Proper calculation of and the distinction between depreciation and amortization is essential to your small business's accounting. Both depreciation and amortization are write-offs. Depreciation represents the decline of fixed assets like buildings and equipment. Amortization shows the decline in the value of liabilities like loans. To properly calculate depreciation and amortization, you need to know an asset's initial value, the time elapsed since its acquisition and the useful life of the asset. Since no rate of interest is given the amortization expenses are Plant cost – Depreciation and amortization exp (338-318) = 20. Depreciation plant cost /no of years =338/20=16.9 and rate of depreciation is 16.9/338x100=5%
3. The average useful life is 20 years.
4. The use of accelerated depreciation methods would have resulted in a 25 % more accumulated depreciation. Accelerated depreciation is a depreciation method whereby an asset loses book value at a faster rate than the traditional straight-line method. Generally, this method allows greater deductions in the earlier years of an asset and is used to minimize taxable income. The most popular accelerated depreciation methods are the Sum of the Years Digits method and the Double Declining Balance (DDB) method. Let's look at the DDB method first.
   The formula for Double Declining Balance Depreciation is:
   ((cost of asset - salvage value) / years of useful life) x 2

              In this case plant life is 20 years and the value is 338. (338/20) x2 =33.8

           And it will definitely result in 25 % more accumulated depreciation.