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 salvage value. 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 salvage value). Include in your memo at least one suggestion of how to estimate each number.


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  • CreatedMarch 27, 2015
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