Assignment: Post a meaningful response to the comment from the students to the c

Question

Assignment: Post a meaningful response to the comment from the students to the cases. All that needs to be said is whether you agree/disagree with the student's comment and any additional remarks.

Case #2.) Ms. Carter, president of a company that manufactures specialty food items, states:

We shall have no difficulty in paying for our new plant assets needed during the coming year because our estimated outlays for new equipment amount to only $80,000 and we have more than twice that amount in our accumulated depreciation account at present.

Student's response: Ms. Carter is incorrect in assuming that an amount displayed in Accumulated Depreciation represents a true asset for the company. Accumulated Depreciation is a contra-account which is intended to represent the depreciation cost associated with using equipment over time. This offsets the purchase value of the equipment being listed as an asset under equipment rather than the current book value. Therefore, the value represented in the account does not represent an actual sum of money that can be used to purchase new equipment. It is merely there to represent the depreciation of the equipment listed as an asset. The only value associated with equipment or accumulated depreciation that would be useful in determining what money is available to purchase new equipment would be the gain or loss from a sale of existing equipment. Otherwise, other available assets such as cash would be used to purchase new equipment if it is not purchased on account.

Case #5.) Ken Carter has applied for a student loan from his bank, As part of the application process, the bank requested a list of Ken’s assets. Ken has a pick-up truck that he uses in a landscaping business. He purchased the truck six years ago for $15,000. Its current fair value is approximately $5,000. Ken’s girlfriend keeps the books for his business and she tells him that the book value of the truck is $7,000. Ken wants to use the truck as collateral for his student loan. He says, “I am not sure whether I can borrow $7,000 using my truck as collateral but I am sure that I can borrow $5,000.”

Student's response: A vehicle is considered a long lived tangible asset of a company. GAAP regulations state that assets must be recorded at cost and adjusted for deprecation and impairment. It also states that you cannot adjust increases in value. With that being said, first of all, it does not state whether this vehicle is considered a business asset. I will assume it is. I cannot determine whether Kens estimation of current fair value or his girlfriends book value guess is correct. I do not know its useful life or residual value and I do not know which depreciation method they are using to get their figures. I think I am safe to assume that they are not using the units of production method or double declining method since they have had it for six years. A student loan is considered a personal debt not a business debt. I do not know if a bank would even consider this as collateral since it is a personal loan and the truck is a business asset. I cannot imagine why Ken would put his business in jeopardy for a student loan.

Explanation / Answer

Case 2 : Disagree with the student comment.

Additional comment: Depreciation accumulates fund for the future use as it is shown as expense which is not the actual cash outflow, so this would be used in future in order to purchase new assets.

Case 5: Agree with the student comment.

Additional comment: Student have the right view as the business has no relation with the student loan. however there can be collateral security of business in exceptional basis.

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