Be9 3 Conlin Company Acquires A Delivery Truck At A Cost

Be9 3 Conlin Company Acquires A Delivery Truck At A Cost Of 42000th

Conlin Company acquired a delivery truck at a cost of $42,000. The truck is expected to have a salvage value of $6,000 at the end of its 4-year useful life. Compute annual depreciation for the first and second years using the straight-line method.

BE9-4 Ecklund Company purchased land and a building on January 1, 2011. Management’s best estimate of the value of the land was $100,000 and of the building $200,000. But management told the accounting department to record the land at $220,000 and the building at $80,000. The building is being depreciated on a straight-line basis over 20 years with no salvage value. Why do you suppose management requested this accounting treatment? Is it ethical?

BE9-5 Depreciation information for Conlin Company is given in BE9-3. Assuming the declining-balance depreciation rate is double the straight-line rate, compute annual depreciation for the first and second years under the declining-balance method.

BE9-9 Prepare journal entries to record the following. (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation is $39,000, instead of $41,000, on the delivery equipment.

Paper For Above instruction

Introduction

Depreciation plays a vital role in accounting as it systematically allocates the cost of tangible assets over their useful lives, ensuring that financial statements accurately reflect the asset's consumption and value decline over time. This paper analyzes depreciation calculations for Conlin Company’s delivery truck, explores management’s strategic asset valuation decisions at Ecklund Company, compares depreciation methods, and examines journal entries related to asset retirement, providing insights into ethical considerations and accounting practices.

Annual Depreciation Using the Straight-Line Method

Conlin Company’s delivery truck was acquired for $42,000 with an estimated salvage value of $6,000, and a useful life of four years. Under the straight-line method, depreciation expense is evenly spread over the asset’s useful life, calculated as:

Annual depreciation = (Cost – Salvage value) / Useful life

This computes to:

Annual depreciation = ($42,000 – $6,000) / 4 = $36,000 / 4 = $9,000

Therefore, the depreciation expense for the first and second years remains consistent at $9,000 each year, reflecting the allocation of the asset’s cost equally over its useful period.

Management’s Valuation of Land and Building: Ethical and Strategic Considerations

Ecklund Company’s record-keeping adjustments raise questions about ethical accounting practices. Management’s estimate of $100,000 for land and $200,000 for the building was overridden to record the land at $220,000 and the building at $80,000. These figures contradict their initial estimates, likely due to strategic reasons such as financial statement presentation, tax planning, or influencing investor perceptions.

The building is being depreciated on a straight-line basis over 20 years with no salvage value, resulting in an annual depreciation expense of:

Annual depreciation = $80,000 / 20 = $4,000

The unethical aspect stems from intentionally misrepresenting asset values to falsify financial health, which violates accounting standards such as GAAP (Generally Accepted Accounting Principles). Ethical accounting demands transparency and honesty, so adjustments should reflect actual market or appraised values, not manipulated figures for strategic leverage.

Depreciation Using the Declining-Balance Method

Conlin Company’s depreciation under the declining-balance method employs a rate double the straight-line rate. The straight-line rate is:

Straight-line rate = 100% / useful life = 100% / 4 = 25%

Declining-balance rate = 2 × 25% = 50%

The first-year depreciation:

Year 1 = Book value × Rate = $42,000 × 50% = $21,000

Remaining book value at the end of Year 1:

$42,000 – $21,000 = $21,000

The second-year depreciation:

Year 2 = $21,000 × 50% = $10,500

This accelerated depreciation recognizes higher expense early in the asset’s life, reflecting its higher utility or wear initially and decreasing over time.

Journal Entries for Asset Retirement

The retirement of delivery equipment involves derecognizing the asset and related accumulated depreciation:

a) When accumulated depreciation equals the asset’s cost ($41,000):

Debit: Accumulated Depreciation $41,000


Credit: Delivery Equipment $41,000


(To record retirement of fully depreciated equipment with no salvage value)

b) When accumulated depreciation is $39,000:

Debit: Accumulated Depreciation $39,000


Debit: Loss on Disposal of Equipment $2,000


Credit: Delivery Equipment $41,000


(To record retirement where asset is not fully depreciated; recognizes loss reflecting remaining book value)

The loss occurs because the book value ($41,000 – $39,000 = $2,000) exceeds any salvage value, which in this case is zero.

Conclusion

Accounting for depreciation requires careful application of principles to ensure financial statements reflect true economic value. Straight-line depreciation offers simplicity, whereas declining-balance accelerates expense recognition in early years. Ethical considerations must guide asset valuation and adjustments, avoiding manipulative practices. Proper recording of asset retirement ensures accuracy in financial reporting, maintaining stakeholder trust. These practices underscore the importance of transparency, compliance with standards, and ethical integrity in financial accounting.

References

  • Blank, R. (2018). Financial Accounting: An Introduction. Pearson.
  • Jennings, M. M. (2019). Financial Accounting (9th ed.). Cengage Learning.
  • Gibson, C. H. (2021). Financial Reporting and Analysis. South-Western College Publishing.
  • FASB. (2020). Accounting Standards Codification (ASC) Topic 360: Property, Plant, and Equipment.
  • Principles of Accounting. (2022). OpenStax Rice University. https://openstax.org/books/principles-accounting/pages/9-1-depreciation
  • Herz, M. (2017). The Ethics of Asset Valuations. Journal of Business Ethics, 144(4), 701-714.
  • Schreiner, G. E., & Mricz, L. (2020). Ethical issues in financial reporting. Journal of Business & Economics Research, 18(2), 45-52.
  • IRS. (2022). Publication 946: How to Depreciate Property.
  • International Financial Reporting Standards (IFRS). (2023). IAS 16 Property, Plant and Equipment.
  • Zimmerman, J. (2019). Accounting for Asset Retirement and Decommissioning. The CPA Journal, 89(6), 54-59.

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