Instructions Comment on the appropriateness of the controller’s comments. Situat
ID: 2423380 • Letter: I
Question
Instructions Comment on the appropriateness of the controller’s comments.
Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized ma- chine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant. Instructions
(a) Discuss the effect of projected demand in units for the new blenders (which may be steady, decreas- ing, or increasing) on the determination of a depreciation method for the machine.
(b) What other matters should be considered in determining the depreciation method? (Ignore income tax considerations)
Explanation / Answer
A./
STEADY DEMAND FOR THE NEW BLENDERS SUGGEST USE OF STRAIGHT LINE METHOD OR UNITS OF PRODUCTION METHOD EITHER OF WHICH ALLOCATE COST EVENLY OVER THE LIFE OF THE MACHINE.
DECEREASING DEMAND INDICATES USE OF AN ACCELERATED METHOD OR UNITS OF PRODUCTION METHOD IN ORDER TO ALLOCATE MORE OF THE COST TO THE EARLIER YEARS.
INCEREASING DEMAND INDICATES USE OF UNITS OF PRODUCTION METHOD OR SINKING FUND METHOD, TO ALLOCATE MORE COST TO THE LATER YEARS.
B./
THE MATTERS TO BE CONSIDERED IN DETERMINNING THE DEPRICIATION METHOD IS AS FOLLOWS.