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
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