CASE – PROPERTY, PLANT &EQUIPMENT Thefollowing is a note accompanying a financia
ID: 2502241 • Letter: C
Question
CASE – PROPERTY, PLANT &EQUIPMENT
Thefollowing is a note accompanying a financial statement ofInternational Paper Company:
Plant, Property, andEquipment
Plant, Properties, and Equipmentare stated at cost less accumulated depreciation. For financialreporting purposes, the company uses the units-of-production methodof depreciating its major pulp and paper mills and certain woodproducts facilities, and the straight-line method for other plansand equipment.
Annual straight-line depreciationrates for financial reporting purposes are as follows:
Fortax purposes, depreciation is computed utilizing acceleratedmethods.
Required:
1. Are thedepreciation methods used in the company’s financialstatements by current income tax laws? If not, who is responsiblefor selecting these methods?
2. Does the companyviolate the consistency principle by using different depreciationmethods for its paper mills and wood products facilities than ituses for its other plan and equipment? If not, what does theprinciple of consistency mean? Explain
3. What is theestimated useful life of the machinery and equipment beingdepreciated with a straight-line deprecation rate of:
4. Who determinesthe useful lives over which specific assets are to bedepreciated?
5. Why do you thinkthe company uses accelerated depreciation methods for income taxpurposes, rather than using the straight-line method?
Explanation / Answer
Loan Amount = Rs. 1,00,000
Interest Rate = 16%
Future Value = Rs. 1,16,000
Present Value of the Loan = 1,16,000 / (1+0.10)4
Present Value = 1,16,000 / 1.4641
Option for leasing:
Years
Cashflows
Discount Factor at 10%
Present Value of Cash flows
0
22,000
1
22,000
1
25,000
0.909
22,725
2
25,000
0.826
20,650
3
25,000
0.751
18,775
4
25,000
0.683
17,075
Net Present value of cashflows
1,01,225
Option for leasing:
Years
Cashflows
Discount Factor at 10%
Present Value of Cash flows
0
22,000
1
22,000
1
25,000
0.909
22,725
2
25,000
0.826
20,650
3
25,000
0.751
18,775
4
25,000
0.683
17,075
Net Present value of cashflows
1,01,225
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