Jims Bike Shop purchased a $2,400 air compressor four years ago The compressor was estimated to have a four year useful life and no salvage value The compressor is now fully depreciated with a zero book value Surprisingly to the businesss owner, the air compressor works like new, and he has no plan...

a The air compressor cannot be depreciated any longer because it already has a zero book value Assets cannot be depreciated below their cost b Yes it is acceptable to keep the asset on the books even ...

Jims Bike Shop purchased a $2,400 air compressor four years ago. The compressor was estimated to have

Question:

Jim’s Bike Shop purchased a $2,400 air compressor four years ago. The compressor was estimated to have a four-year useful life and no . The compressor is now fully depreciated with a zero book value. Surprisingly to the business’s owner, the air compressor ‘‘works like new,’’ and he has no plans to replace it.
Required:
(a) Should this business continue to record depreciation expense on the air compressor each year? Why or why not?
(b) Should a business keep a fully depreciated asset on its books indeﬁnitely as long as the asset is being used in the business? Why or why not?
(c) Explain how the matching principle was violated by Jim’s Bike Shop and how this violation affected the ﬁnancial statements of the business. Was this violation intentional? How might a company use depreciation to mislead users of the ﬁnancial statements?
(d) Write a memo to Jim explaining the importance of the assumptions made at the asset’s acquisition (useful life and ). Include in your memo at least one suggestion of how to estimate each number.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...