Carlos Rodriguez sells and erects shell houses, that is, frame structures that are completely finished on the
Question:
Rodriguez buys shell houses from a manufactorer in unassembled packages consisting of all lumber, roofing, doors, windows, and similar materials necessary to complete a shell house. When starting operations in a new area, Rodriguez buys or leases land as a site for its local warehouse, field office, and display houses. He erects sample display houses at a total cost of $20,000 to $29,000 including the cost of the unassembled packages. The chief element of cost of the display house is the unassembled packages; the assembly process is a short, low-cost operation. Every 3 to 7 years Rodriguez tears down old sample models or alters them into new models. Sample display houses have little salvage value because dismantling and moving costs amount to nearly as much as the cost of an unassembled package.
Instructions
(a) Rodriguez must choose between
(1) Expensing the costs of sample display houses in the periods in which the expenditure is made and
(2) Spreading the costs over more than one period. Discuss the advantages of each method.
(b) Would it be preferable to amortize the cost of display houses on the basis of
(1) The passage of time or
(2) The number of shell houses sold? Explain.
(AICPA adapted)
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...
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Related Book For
Intermediate Accounting principles and analysis
ISBN: 978-0471737933
2nd Edition
Authors: Terry d. Warfield, jerry j. weygandt, Donald e. kieso
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