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Chapter 9 - Solution Manual

Although service life usually is measured in units of

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Although service life usually is measured in units of time, it may be more appropriate to use units of output or activity which usually are expressed in physical units such as tons, gallons, miles or machine-hours. In selecting the appropriate unit of service for each asset, consideration should be given to the factors that decrease the service life of an asset. These factors may be divided into two classes: (1) physical causes including casualties and (2) economic and functional causes. The physical causes are the physical deterioration and impaired utility of the asset that result (1) from wear and tear that is due to operating use and (2) from other forms of decay that are due to the action of the elements. Damage resulting from unusual events such as accidents, earthquakes, floods, hurricanes, and tornadoes also may reduce or end asset usefulness. An asset that is in good physical condition may lose its economic usefulness as a result of technological obsolescence and inadequacy (or economic obsolescence). Technological obsolescence results from innovations and improvements that make the existing plant obsolete. Inadequacy usually results from the effects of growth and change in the scale of a firm's operations that reduce or terminate the service life of assets. iii. Choosing the method of cost apportionment. The problem here is to determine the relative portion of services that has expired in each accounting period. This might be approached by estimating whether all units of service are equally valuable (and have an equal cost) or whether some service units have a higher value and cost than others. The two major variables to be considered in reaching the rational and systematic solution to this problem are: (1) whether the quantity of services withdrawn from the bundle will be equal or will vary during the periods of service life and (2) whether the value or cost of various units of service will be equal or will vary during the periods of service life. d. There are a number of systematic depreciation methods that recognize these factors in varying degrees and could be used for the computer system; these may be classified as follows: i. On the basis of time-- (1) A constant charge per period, i.e., the straight-line method. (2) A decreasing charge per period, i.e., a declining- balance or the sum-of-the years digits method. (3) An interest (increasing charge) method in which the depreciation charges are adjusted using the entity's average internal rate of return. ii. On an output measure basis-- (1) A charge based upon a ratio of a constant cost to net revenue contribution; i.e., the cost allocation for each period would be a constant proportion of the net revenue contribution of the computer system.
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172 (2) A charge based upon the expected physical services from the computer system; i.e., the cost allocation would be in terms of hours, days or months of operation or some other measure of input or output related to the computer services. Case 9-4
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Although service life usually is measured in units of time...

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