Violation of GAAP in Schweser answer (I think)

[kkent]

Embassy Corp. purchased a milling machine on June 30, 2001, for $6,600,000. The machine was being depreciated using the straight-line method over five years until January 1, 2004, when the total useful life was revised downward to four years and the salvage value was changed from $600,000 to $300,000

Depreciation Expense related to this machine as shown on Embassy�s income statement for the year ended December 31, 2004, is:

A) $2,000,000.
B) $1,800,000.
C) $1,200,000.
D) $2,200,000.

Your answer: B was incorrect. The correct answer was D) $2,200,000.

The book value of the machine at January 1, 2004, was $3,600,000 (the purchase price of $6,600,000 less straight line depreciation for 30 of the 60 months of useful life based on purchase price less salvage value (($6,600,000 - $600,000) / 60 * 30 = $3,000,000). Revising the salvage value to $300,000 means that $3,300,000 ($3,600,000 - $300,000) remains to be depreciated over the revised remaining useful life of 18 months. Therefore, 12 of the final 18 months of depreciation take place in 2004, and 2004 depreciation is ($3,300,000 / 18 * 12 =) $2,200,000.




I'm almost positive this is a violation of GAAP. I believe that according to GAAP, one must depreciate an asset for the entire year or for none of the year when a purchase is made in the middle of the year. I'm ALMOST certain there is no such thing as prorating depreciation over months. Any accountants in the house? Did my accounting classes teach me wrong?

 

[mwvt9]

I know for tax accounting you can do partial year depreciation. Unsure on GAAP. Why would GAAP have a problem with this kkent?

The concept of depreciation of course is to match the cost of the asset with the revenues it generates over time. I don't see how it would be a problem for a partiall year, but then again I will probably bag a 40% in FSA.

 

[kkent]

mw, I did a quick bit of research and found that one MAY, in fact, prorate depreciation but that it is usually not prorated (it is depreciated in whole years). This question, then---IMHO--sucks because it chooses a single method when for the correct answer there are, in fact, 2 correct methods. And of course, Schweser chose the method that is used least. But FWIW to whoever is reading this, yes, one may prorate depreciation--it's bad accounting and I've never heard of an accountant doing this (my dad wrote accounting textbooks), but you can still do it.

This kind of a garbage question pisses me off.



Edited 1 time(s). Last edit at Monday, May 14, 2007 at 11:06PM by kkent.

 

[plyon]

kkent...

My experience with Schweser has been excellent when I've pointed out irregularities with questions (either from the text or from the Qbank).

Their responses have always been thoughtful and relatively timely.

I suggest you make your point to them directly and I would be surprised if you didn't get a satisfying response.