1.
Carrying
Value
**
***
2.
3.
Rounded
To reduce to estimated residual value
P7. Comparison of Depreciation Methods
If the printer was sold for $12,000 after year 2, the gain or loss under each method
follows:
Depreciation Table
Straight-line results in equal amounts of annual depreciation over the five years. The
Depreciation
Method Year Computation
Depreciation
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1.
Carrying
Value
Depreciation
Year Computation
Depreciation
Method
Depreciation Table
P8. Comparison of Depreciation Methods
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b.
5.
P9. Natural Resource Depletion and Depreciation of Related Plant Assets
Depreciation, straight-line method
If the company sold and mined 1,000,000 tons of ore instead of 800,000, the amount of
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Cases
C3. Conceptual Understanding: Accounting Estimates
return on assets. Therefore, a comparison of these two companies would result in Marriott
terioration that will occur and the rate at which the asset will become obsolete.
are the estimated useful life and the residual value. The two most important factors that
must be taken into consideration in making these estimates are the extent of physical de-
The two principal estimates that must be made to compute the annual depreciation charge
C1. Conceptual Understanding: Effect of Change in Estimates
C4. Interpreting Financial Reports: Brands
The advantage to the airlines of increasing the useful life of aircraft is that the annual de-
Brands are recorded when purchased from other companies; therefore Starwood’s asset
appearing to outperform Starwood.
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1.
2.
3.
When evaluating assets for impairment, CVS first compares the carrying value of the
Property, equipment, and improvements to leased premises are depreciated using
the straight-line method. Estimated useful lives generally range from 10 to 40 years
for buildings, building improvements, and leasehold improvements, and 3 to 10
years for fixtures and equipment and internally developed software. CVS will have
and equipment have shorter useful lives than the buildings.
ciated over the life of the leases and thus reduce income by the amount of the de-
preciation (excluding tax effects).
Leasehold improvements are improvements to leased property that become the
C5. Annual Report Case: Long-Term Assets
In 2011, property and equipment, net constituted 13.1 percent ($8,467 / $64,543)
of total assets.
The main components of property and equipment were land, building and improve-
used in this analysis are less than the carrying amount of the asset, an impairment
to remodel its stores several times over the life of the buildings because the fixtures
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1.
2.
= $1,385 – – $968 +
= $1,561 – – $493 +
= $1,055
$132010 $0
2011 $0
Purchases of
Plant Assets Sales of
Plant Assets
(in millions)
part of their expansion through operations.
Both companies have positive free cash flow. This means both companies can fund
$14
Southwest
=
CVS
–– +
Free
Cash Flow
Southwest is growing its property and equipment more rapidly (from 4.7% to 8.0%
CVS 2011
C6. Comparison Analysis: Long-Term Assets and Free Cash Flows
(in millions)
2010
Dividends
Net Cash Flows from
Operating Activities
per year).
*Rounded
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C8. Continuing Case: Annual Report Project
judgment. However, some reasonable allocation can usually be made based on separate
appraisals of the land and the building. The company and therefore the people who have
a stake in it, such as the stockholders and management, would probably benefit from the
approach that would save income taxes. Thus, to the extent that an appraisal of the rela-
plan) will have a possible effect on cash flows in that it will reduce income taxes by
$32,400 compared to the CFO’s plan. This is an ethical dilemma to the extent that one or
the other of the plans is a false representation of the true situation. In cases like this, the
true allocation between land and building is unlikely to be precise and is a matter of
Depreciation in and of itself does not affect cash flows because it is an allocation of the
cost of purchase and does not require a cash outlay when it is recorded. However, cash
C7. Ethical Dilemma: Ethics and Allocation of Acquisition Costs
Note to Instructor: Answers will vary depending on the company selected by the students.
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