The following is a neile accompanying a recent financial statement of International Paper Company:
Plant, Properties, and Equipment
Plant, properties. and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, the company uses the units-of-production method of depreciating its major pulp and paper mills and certain wood products facilities, and the straight-line method for other plant and equipment.
Annual straight-line depreciation rates for financial reporting purposes are as follows: buildings percent to 8 percent: machinery and equipment 5 percent to 33 percent: woods equipment 10 percent to 16 percent. For tax purposes, depreciation is computed utilizing accelerated methods.
Instructions
a. Are the depreciation methods used in the company’s financial statements determined by current income tax laws? If not, who is responsible for selecting these methods? Explain.
b. Does the company violate the consistency principle by using different depreciation methods for its paper mills and wood products facilities than it uses for its other plant and equipment? If not, what does the principle of consistency mean? Explain.
c. What is the estimated useful life of the machinery and equipment being depreciated with a straight-line depreciation rate of:
1. 5 percent.
2. 33 percent (round to the nearest year).
d. Who determines the useful lives over which specific assets are to be depreciated?
e. Why do you think the company uses accelerated depreciation methods for income tax purposes, rather than using the straight-line method?
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