Monday, October 31, 2005

I feel so smart!

I asked the online tutor a couple of long and convoluted questions yesterday, just to make sure I was undestanding the materials.

Here is my latest convoluted question:

Let me see if I am understanding the logic behind this correctly.

At the bottom of p 622 and top of p 623, the textbook reads as follows:

"If the plant and equipment has a remaining useful life of 10 years and Small uses straight-line depreciation, Giant needs to increase the depreciation expense for Small by $40,000 divided by 10 years, or $4,000 each year for the next 10 years."

When using the equity method, the proportionate share of Small's net income would be applied to the original investment amount. When Small records the depreciation, it would debit depreciation expense and credit accumulated depreciation. Depreciation expense is already a component of net income (or loss) for Small.

Therefore, Giant would not need to adjust depreciation expense when accounting for proportionate net income from Small, except that in this example, the market value of plant and equipment exceeded its book value at the date that Giant acquired shares. So the adjustment Giant is making to depreciation expense in this example is to allocate the amount that market exceeded book at the date Giant purchased the shares to the remaining years of useful life of the asset in question.

I think I understand; it's just a little convoluted in my mind, and I want to make sure I have a proper handle on this.

Thanks.


I was actually right! Could it be I am starting to grasp some of the information on investments, hmmm? If so, then it's about time!

4 comments:

Dottie P. said...

I understood the words "Small", "Giant", and "convoluted". Holy crap.

Trish said...

I know, eh? And this is only a Level 2 course ... there are 5 levels in the program. (Shudder.)

Anonymous said...

Let me see if I am understanding the logic behind this correctly.

At the bottom of p 622 and top of p 623, the textbook reads as follows:

"If the Small Giant has equipment with a remaining useful life of 10 years and the giant Small uses straight-light refraction, G.S. needs to increase the refraction using several bed sheets OR expense a pack of gum for Small by $40,000 divided by 10 days of news coverage, or $4,000 each year for the next 10 Gomery Reports."

When using the actors-equity method, the proportionate share of S.G.'s net income would be applied to the original gum purchase amount while S.G. records the light refraction in his handy dandy notebook. It would credit refraction with saving the GST and NAFTA and debit some more yoyos for Paul for accumulated depreciation. Refraction of light is already a component of basic physics and does therefore not apply to this question.

Therefore, G.S. would not need to adjust light refraction values when accounting for disproportionate Cod fishing nets from S.G., except that in this example, the market value of notebooks and fishing equipment exceeded its pawn shop value at the dinner and a movie date where G.S. acquired the chewing gum. So the adjustment G.S. is making to the light refraction and chewing gum values in this example is so finicky that we need to allocate the amount that market exceeded Shepherd Book at the date G.S. purchased the shares to the remaining years of useful life of the gum, prism and bed sheet assets in question.

I think I understand; it's just a little convoluted in my mind, and I want to make sure I have a proper handle on this.

Thanks.

paulwallace.com/blog
THE ONE TRUE BLOG

Trish said...

Yes, yes. That was it. Thanks Paul.

(You made me laugh out loud!)