Hakodat Manufacturing Group was organized January 1, 2022. During 2022, it has used in its reports to management the straight-line method of depreciating its plant assets.

On November 8, you are having a conference with Hakodat’s officers to discuss the depreciation method to be used for income tax and shareholder reporting. Tao Chen, president of Hakodat, has suggested the use of a new method, which he feels is more suitable than the straight-line method for the needs of the company during the period of rapid expansion of production and capacity that he foresees. Following is an example in which the proposed method is applied to a fixed asset with an original cost of ¥248,000, an estimated useful life of 5 years, and a residual value of approximately ¥8,000 (amounts in thousands).

The president favors the new method because he has heard that:

1. It will increase the funds recovered during the years near the end of the assets’ useful lives when maintenance and replacement disbursements are high.

2. It will result in increased write-offs in later years and thereby will reduce taxes. 

Instructions

a. What is the purpose of accounting for depreciation?

b. Is the president’s proposal within the scope of international financial reporting standards? In making your decision, discuss the circumstances under which use of the method would be reasonable, if any, and those under which it would not be reasonable, if any.

c. The president wants your advice on the following issues.

1. Do depreciation charges recover or create funds? Explain.

2. Assume that the taxing authorities accept the proposed depreciation method in this case. If the proposed method were used for shareholder and tax reporting purposes, how would it affect the availability of cash flows generated by operations?

Transcribed Image Text:

Years of Fraction Depreciation Accumulated Depreciation Book Value at at End of Year Year Life Used Rate Expense End of Year 45 ¥ 16,000 1 ¥16,000 ¥232,000 45 32,000 48,000 200,000 3 345 3 48,000 96,000 152,000 4 4 4. 15 64,000 160,000 88,000 5/. 15 80,000 240,000 8,000 1.