Question

At the last meeting of the executive committee of Kearins, Ltd., the controller was severely criticized by both the president and vice-president of production about the recognition of periodic depreciation. The president was unhappy with the fact that what he referred to as “a fictitious item’’ was deducted, resulting in depressed net income. In his words, “Depreciation is a fiction when the assets being depreciated are worth far more than we paid for them. What the controller is doing is unduly understating our net income. This in turn is detrimental to our shareholders because it results in the undervaluation of our shares on the market.’’
The vice-president was equally adamant about the periodic depreciation charges; however, she presented a different argument. She said, “Our maintenance people tell me that the level of maintenance is such that our plant and equipment will last virtually forever.’’ She further stated that charging depreciation on top of maintenance expenses is double-counting—it seems reasonable to charge either maintenance or depreciation but not both.
The time taken by other pressing matters did not permit the controller to answer; instead, you were asked to prepare a report to the executive committee to deal with the issues raised by the president and vice-president.

Required
As the controller’s assistant, prepare the required report.



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  • CreatedJanuary 08, 2015
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