Exercise 9.5
2
E X E R CISE9.5 Ar e ce n t a n nu a l r e p o rt of H .J. H e i n z C o m p an y i n cl u d e s t h e f o llo w in g n ot e : D e p reci a tio n : F o r fi n an ci a l r e p or t in g p u r p o se s, d e p r e ci a t i o n i s p r ov i d e d on t h e str a i g h t- l i n e m e t h o d ov e r t h e e st i m a t e d use f u l l i ve s o f t h e ass e t s, w h i ch g en e ra l l y h av e t h e f o l l o w i n g ran g es: b u i l d i n g s - 4 0 yea rs or l e ss; m a ch in e r y a n d e q u i p m e n t -- 15 ye a r s o r l e ss; com p u t e r so f t w a re -- 3 - 7 ye a r s; an d l ea se h o l d im p rove m ents - - ove r t h e l i f e of t h e l ea se , no t t o exce ed 15 ye a r s. A cce l er a t e d de pr e ci at i on m et ho ds are ge ne ra l l y u sed f or i nc o m e t a x p ur po se s. A . i s t h e co m p a ny vi o l at i n g t h e a ccou n t i n g p r i n ci p l e o f co n si st e n cy b y u si n g d i ff e r e n t d e p re ci a t i o n m e t h o d s i n i t s fi n a n ci a l st a t e m e n ts t h a n i n i t s i n co m e t a x r e tur n s? E xp l a i n . Ans:The an sw eri s “No”,the y ar e no tvi olating the acco unting principle ofco nsist en cy be cau se co n si st en cy ref e rs to ye ar t o ye a r fi n a n ci a l a cc o u n t in g , n o t t o ta x a cco u ntin g B . Why d o you t hi nk t ha t t he co m pa ny uses ac ce l e rat ed de p r ec iation m et ho ds in i t s i nc om e tax r et urns ? A n s: t h e c o m p a ny u se s t h e a cceler a t e d d e p r e ci a t i o n m et h od i n o r d er to l ow er cu rr e n t ta xe s. C . W o u l d t h e use of a cce l e r a t e d d e p reci a ti o n in t h e fi n a n ci a l st a te m e n t s b e mor e c o n se rvati ve o r l e ss co n se rvati ve t h a n t h e cu rr e n t p racti ce o f u sin g t h e str a i g h t - l i n e m et h o d ? E xp l ain. A n s: It isn e i t h e r m o re co nser va t ivenor l e ss co n se rvati ve , an a lystsad j ust f o r d i ff erent depr e ci a t i o n metho ds t o m ake t he n co nsistent acr oss com pani es
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Transcript of Exercise 9.5
7/25/2019 Exercise 9.5
http://slidepdf.com/reader/full/exercise-95 1/1
EXERCISE 9.5
A recent annual report of H.J. Heinz Company includes the following note:
Depreciation: For financial reporting purposes, depreciation is provided on the straight-line method over
the estimated useful lives of the assets, which generally have the following ranges:
buildings - 40 years or less; machinery and equipment -- 15 years or less; computer software -- 3 - 7
years; and lease hold improvements -- over the life of the lease, not to exceed 15 years. Accelerated
depreciation methods are generally used for income tax purposes.
A. is the company violating the accounting principle of consistency by using different depreciation
methods in its financial statements than in its income tax returns? Explain.
Ans: The answer is “No”, they are not violating the accounting principle of consistency because
consistency refers to year to year financial accounting, not to tax accounting
B. Why do you think that the company uses accelerated depreciation methods in its income tax returns?
Ans: the company uses the accelerated depreciation method in order to lower current taxes.
C. Would the use of accelerated depreciation in the financial statements be more conservative or less
conservative than the current practice of using the straight-line method? Explain.
Ans: It is neither more conservative nor less conservative, analysts adjust for different depreciation
methods to make then consistent across companies
