3 Periodic income is not distorted by gains or losses on disposal of assets 4 A

3 periodic income is not distorted by gains or losses

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(3) Periodic income is not distorted by gains or losses on disposal of assets. (4) A more useful deduction from income is derived from these methods because of their recognition that depreciation estimates are based on averages and that gains and losses on individual assets are of little significance. Arguments against the use of the group and composite-life methods would include:
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(1) The methods would conceal faulty estimates for a long period of time. (2) When there is an early heavy retirement of assets a debit balance might appear in the Allowance for Depreciation account and present an accounting problem. (3) Information is not available regarding a particular machine for cost-calculation purposes. (4) Under a decentralized financial control system where a measure of the division's efficiency is the rate of return on the gross book value of the investment, to improve a division's financial reports a division manager might scrap idle but serviceable equipment or equipment that is not earning a satisfactory return on book value. The company would sustain an actual loss in the amount of the value of the equipment scrapped. (5) Under the same situation as in argument 4, except that net book value is used, where the assets, although serviceable, are fully or almost fully depreciated, the division manager might hesitate to replace them because of the high rate of return on investment. 3. Under the unit method, retirements are recorded by removing from the accounts the cost of the asset and its related accumulated depreciation. The difference between the two accounts, adjusted for salvage and disposal costs, if any, is recognized as a gain or loss. C11-1 (continued) 3. (continued) Under the group and composite-life methods, the cost of the retired asset is removed from the Asset account, and the Accumulated Depreciation account is reduced by the amount of the cost of the retired asset, adjusted for salvage, salvage costs, and removal costs. Accordingly, there is no periodic recognition of gain or loss; the
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Depreciation Allowance account serves as a suspense account for the recognition of gain or loss until the final asset retirement. End tjb ACC302 6-2012
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