The U.S. GAAP requires a company to disclose the depreciation expense for the period, the balances of assets, accumulated depreciation and a general description of the depreciation method(s) used.
Estimates of average age and remaining useful life of a company's assets reflect the relationship between assets accounted for on a historical cost basis and depreciation amounts.
Assume straight-line depreciation and no salvage value:
Average age data is useful in comparing the quality of fixed assets across companies. Newer assets are likely to be more efficient. Thus, firms with newer assets are more competitive. An analyst can use average age data to forecast major capital expenditures and the corresponding financing requirements in the future.
However, the average age data are subject to several limitations.
Depreciation expense: $13,792;
What is the approximate average useful life of Home Furnishings'property and equipment?
A. 26.53 years
The correct computation is $187,113 /13,792 = 13.57 years.
A. mix of assets
Estimating the average age of the assets can help in the assessment of efficiency; however, the estimate may be distorted by unknown changes in the mix of assets or material acquisitions made.
Current assets: $10,000
The average age of fixed asset is estimated to be:
A. 1 year.
Current assets: $10,000
The average depreciable life of fixed assets is:
A. 3 years.
A. Net income is affected by inflation and total assets are getting older.
As the assets age, the net asset book value decreases and the return on assets ratio increases. This return ratio does not reflect economic substance, however, since income is measured in current period dollars while the denominator (assets) is measured using historical information rather than replacement information.
Note 5: Assets placed in service before January 1, 2009, are depreciated using an accelerated method. Assets placed in service in 2009 will be depreciated using the straight-line method of depreciation. This change in accounting principle is being made to reflect improvements in the design and flexibility of manufacturing machinery and equipment and improvements in maintenance practices. These improvements have resulted in more uniform productive capacities and maintenance costs over the useful life of an asset. Straight-line is preferable in these circumstances. The change is expected to improve 2009 after-tax results by $80 to $100 million. The change was not made for income tax reporting purposes.
Which of the following would generally be true as a result of this change?
A. return on assets would increase.
Income will increase because less depreciation is being taken out of income. The assets will gradually decrease. Both effects together will increase the return on assets.
A. 11 years.
The average life can be calculated by dividing the original cost by the depreciation expense. Land should be deducted, as it is not depreciated. The average life is 10 years [($6,000,000 - $1,000,000)/$500,000].
The average life can be calculated by dividing accumulated depreciation by the current year's depreciation expense. Thus, $300,000 divided by depreciation expense is 15 years. Therefore, depreciation expense is $20,000.