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The following is a noteaccompanying a financial statement of International Paper

ID: 2502252 • Letter: T

Question

The following is a noteaccompanying a financial statement of International PaperCompany:

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:

           • Building 2.5 % to 8%

           • Machinery and Equipment 5% to 33%

           • Woods equipment 10% to 16%

For tax purposes, depreciation iscomputed utilizing accelerated methods.

Required:

           1. Are the depreciation methods used in the company’sfinancial statements by current income tax laws? If not, who isresponsible for selecting these methods?

           2. Does the company violate the consistency principle by usingdifferent depreciation methods for its paper mills and woodproducts facilities than it uses for its other plan and equipment?If not, what does the principle of consistency mean? Explain

           3. What is the estimated useful life of the machinery and equipmentbeing depreciated with a straight-line deprecation rate of:

      i. 5%

      ii. 33%

           4. Who determines the useful lives over which specific assets areto be depreciated?

           5. Why do you think the company uses accelerated depreciationmethods for income tax purposes, rather than using thestraight-line method?

Explanation / Answer

Corrected Income Statement

2008

2007

Sales

200,000.00

160,000.00

Cost of Goods Sold

150,000.00

100,000.00

Gross Profit on Sales

50,000.00

60,000.00

Operating Expenses

30,000.00

20,000.00

Net Income

20,000.00

40,000.00

Increase in Net income due

10,000.00

to understatement of closing

inventory

Decrease in Net income due

(10,000.00)

to understatement of opening

inventory

CorrectedIncome

10,000.00

50,000.00

Corrected Income Statement

2008

2007

Sales

200,000.00

160,000.00

Cost of Goods Sold

150,000.00

100,000.00

Gross Profit on Sales

50,000.00

60,000.00

Operating Expenses

30,000.00

20,000.00

Net Income

20,000.00

40,000.00

Increase in Net income due

10,000.00

to understatement of closing

inventory

Decrease in Net income due

(10,000.00)

to understatement of opening

inventory

CorrectedIncome

10,000.00

50,000.00