CA11-3 (Depreciation—Strike, Units-of-Production, Obsolescence) Presented on pag

Question

CA11-3 (Depreciation—Strike, Units-of-Production, Obsolescence) Presented on page 634 are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation.

Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points

1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production.

2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred. Instructions Comment on the appropriateness of the controller’s comment

Explanation / Answer

The method of depreciation used should be rational and systematic.Depreciation expense is the estimate of the loss of fair value

In this case if the comapny employs straight line method of depreciation then it would be inappropirate to stop charging the depreciation however if the company uses unit of activity method then in that case no depreciation should be charged since there is no activity, thus the appropirateness depends on which method is employed by the company.

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