Question

On March 10, 2019, Lost World Company sells equipment that it purchased for $192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straightline method of depreciation. Following are the assumptions with respect to partial periods: (1) Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for the base and record depreciation through March 9, 2019.) (2) Depreciation is computed for the full year on the January 1 balance in the asset account. (3) Depreciation is computed for the full year on the December 31 balance in the asset account. (4) Depreciation for one-half year is charged on plant assets acquired or disposed of during the year. (5) Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal. (6) Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.

Answer 1

Solution:-

The most accurate distribution of cost is given by methods 1 and 5 if it is assumed that straight-line is satisfactory_ Reasonable accuracy is normally given by 2, 3, or 4_ The simplest of the applications are 6, 2, 3, 4, 5, and 1, in about that order Methods 2, 3, and 4 combine reasonable accuracy with simplicity of application