CASE STUDY ON REVISING DEPRECIATION ESTIMATES

ACCTG 14
CN 3004

SUBMITTED BY: DONNA MAE A. SINGSON

 Short Cases
Follow the instruction given on the ff. cases.
Financial statement versus tax depreciation
CASE 1
The following is an excerpt from a conversation between two employees of WXT
Technologies, Nolan Sears and Stacy Mays. Nolan is the accounts payable clerk, and
Stacy is the cashier.
Nolan: Stacy, could I get your opinion on something?
Stacy: Sure, Nolan.
Nolan: Do you know Rita, the fixed assets clerk?
Stacy: I know who she is, but I don't know her very well. Why?
Nolan: Well, I was talking to her at lunch last Monday about how she liked her
job. you know, the usual; and she mentioned something about having to keep
two sets of books one for taxes and one for the financial That can’t be good
accounting, can it? What do you think?
Stacy: Two sets of books? It doesn't sound right.
Nolan: It doesn't seem right to me either was always taught that you had to use
generally accepted accounting principles. How can there be two sets of books? What
can be the difference between the two?
How would you respond to Nolan and Stacy if you were Rita? Improvements and
repairs.
If I were Rita I would like to inform Nolan and Stacy that as an accounting clerk
with experience in numerous audit and accounting job descriptions, I can tell you
that keeping two sets of books is perfectly legal and normal. Each firm or group
of firms' functional currency, account structure, and accounting calendar are
determined by a set of books. Set up one additional set of books for each
reporting currency if you need to report on your account balances in several
currencies.
The idea behind maintaining two sets of books is for publicly traded corporations to
be able to prepare financial statements for the US Securities and Exchange
Commission, investors, and, on occasion, the Internal Revenue Service. This is viewed
as a benefit because it demonstrates to investors that they are a wealthy corporation.
One set of books is for the financial statements that they present to shareholders when
they file their quarterly reports with the U.S. SEC, and that set is prepared according to
GAAP (generally accepted accounting principles). The other set is the books they keep
to pay their taxes to the IRS.
 Keeping two sets of books for business is a totally typical and legal approach to
prepare for an audit. Due to the significant differences in financial and tax reporting,
keeping two sets of books will allow organizations to avoid having to reconcile two
standards in a hurry. To react to any audit queries or assessments, they only need to
prepare what is contained in the appropriate books.
In addition, the amount of depreciation expense a corporation is allowed to take on
its equipment is one of the most prevalent discrepancies between one book for financial
GAAP and two books for tax purposes (IRS). Companies, for the most part, attempt to
follow the "matching principle" when it comes to hiring. monetary accounting. In other
words, they strive to match when revenue is earned with when expenses are incurred
expensed. This matching helps them plan for capital expenditures in the future. On the
other hand, government, for tax purposes, doesn't much care for "generally accepted"
and is often only concerned with what actually happened. Therefore, depreciation
expenses for them is not a deductible expense every year since it was deducted already
when it was acquired.
CASE 2
Miss U PH owns three delivery trucks. Details for each truck at the end of the most
recent year follow:
Expected Accumulated
Age Useful Life Initial Cost Depreciation
Truck 1 3 6 $22,500 $11,250
Truck 2 5 6 26,250 21,875
Truck 3 2 6 281500 9,500
At the beginning of the year, a hydraulic lift is added to Truck 1 at a cost of
$4,500. The addition of the hydraulic lift will allow’s the company to deliver much larger
objects than could previously be delivered. At the beginning of the year, the engine of
Truck 2 is overhauled at a cost of $5,000. The engine overhaul will extend the truck's
useful life by three years.
Write a short memo to Miss U's chief financial officer explaining the financial
statement effects of the expenditures associated with Trucks 1 and 2. (below)