Problem 5 (15%) A. Joe's Deli had been depreciating its delivery van using the straight-line method. Net sales from deliveries were as follows for the period from March through September of each year: 2016: $120,000 2017: $123,000 2018: $121,000 2019: 122,000 2020: $74,000 In response to the sharp decrease in sales in 2020 due to COVID-19,Joe asks his accountant to switch to activity-method depreciation for the van because we need to under-report our expenses this year in light of the sharp decline in net sales." His accountant informs Joe that his suggestion will NOT result in under-reporting expenses, but instead will more accurately report the expense." Do you agree with Joe's accountant? Explain. B. You suspect Airline A has been overstating net income by understating depreciation on the B737-900 aircraft in its fleet. To check on this, you do research and discover the following: Airline A B Aircraft B737-900 B737-900 B737-900 B737-900 Hours Operated Per Year 3,150 3,200 3,175 3,125 Depreciation Method Straight-Line Straight-Line Straight-Line Straight-Line D You are relieved to observe the above similarities, but realize you must compare the airlines' depre- ciation calculations in two additional ways, one of which was stressed in the lecture notes, before you can feel okay about Airline A's depreciation of its B737-900. You need to make comparisons of: 1. 2. C Why would an analyst wish to know the percentage of the historical cost of any firm's property, plant and equipment that is being shown in the Accumulated Depreciation account? 7 Problem 5 (15%) A. Joe's Deli had been depreciating its delivery van using the straight-line method. Net sales from deliveries were as follows for the period from March through September of each year: 2016: $120,000 2017: $123,000 2018: $121,000 2019: 122,000 2020: $74,000 In response to the sharp decrease in sales in 2020 due to COVID-19,Joe asks his accountant to switch to activity-method depreciation for the van because we need to under-report our expenses this year in light of the sharp decline in net sales." His accountant informs Joe that his suggestion will NOT result in under-reporting expenses, but instead will more accurately report the expense." Do you agree with Joe's accountant? Explain. B. You suspect Airline A has been overstating net income by understating depreciation on the B737-900 aircraft in its fleet. To check on this, you do research and discover the following: Airline A B Aircraft B737-900 B737-900 B737-900 B737-900 Hours Operated Per Year 3,150 3,200 3,175 3,125 Depreciation Method Straight-Line Straight-Line Straight-Line Straight-Line D You are relieved to observe the above similarities, but realize you must compare the airlines' depre- ciation calculations in two additional ways, one of which was stressed in the lecture notes, before you can feel okay about Airline A's depreciation of its B737-900. You need to make comparisons of: 1. 2. C Why would an analyst wish to know the percentage of the historical cost of any firm's property, plant and equipment that is being shown in the Accumulated Depreciation account? 7
