Tri-City Ironworks Co. reported $44,500,000 for equipment and $29,800,000 for accumulated depreciation—equipment on its balance sheet

Tri-City Ironworks Co. reported $44,500,000 for equipment and $29,800,000 for accumulated depreciation—equipment on its balance sheet.

Does this mean (a) that the replacement cost of the equipment is $44,500,000 and (b) that $29,800,000 is set aside in a special fund for the replacement of the equipment? Explain.


Answer:
a. No. The $44,500,000 represents the original cost of the equipment. Its replacement cost, which may be more or less than $44,500,000, is not reported in the financial statements.

b. No. The $29,800,000 is the accumulation of the past depreciation charges on the equipment. The recognition of depreciation expense has no relationship to the cash account or accumulation of cash funds.




Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage: (a) 4 years, (b) 8 years, (c) 10 years, (d) 16 years, (e) 25 years, (f) 40 years, (g) 50 years.


Answer:
(a) 25% (1/4), (b) 12.5% (1/8), (c) 10% (1/10), (d) 6.25% (1/16), (e) 4% (1/25),
(f) 2.5% (1/40), (g) 2% (1/50)