Student Forums CMA Part 2 Section F: Professional Ethics 1. Question ID: Pro-Kleen (Topic: The IMA Code of Ethics – Pro-Kleen)

# 1. Question ID: Pro-Kleen (Topic: The IMA Code of Ethics – Pro-Kleen)

• This topic has 4 replies, 2 voices, and was last updated 1 month, 2 weeks ago by Sudhish Karthiarath Charan.
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• #244480

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Sudhish Karthiarath Charan
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Hello Lynn,

Below is the Essay Question# in Ethics. Since it is big i have not pasted here. Only provided the no. Its asked to find the revised depreciation. Can you please tell why this salvage value deducted while calculating depreciation as it is clearly mentioned in the text that salvage value will not consider as per GAAP to find out depreciation?

1. Question ID: Pro-Kleen (Topic: The IMA Code of Ethics – Pro-Kleen)

C. Without considering Ryan’s instruction to reduce depreciation expense, calculate Pro-Kleen’s revised annual depreciation expense?

Pro-Kleen’s revised annual depreciation expense is \$53,500 calculated as follows.

Original annual depreciation = (Cost – Salvage) ÷ Estimated life = (\$200,000 − \$20,000) ÷ 8 = \$22,500

Net book value, Jan. 1, 20X8 = \$200,000 − (\$22,500 × 2.5) = \$143,750

Revised annual depreciation = (Net book value – salvage) ÷ Remaining life = (\$143,750 − \$10,000) ÷ 2.5 = \$53,500

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• #244487

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Lynn Roden
HOCK international

Hello Sudhish Karthiarath Charan,

It is fine that you did not paste the question in your posting. You gave me everything I needed to find the question you are asking about.

As you probably know, depreciation for financial reporting is calculated differently from depreciation for income tax reporting. You are probably thinking of the way depreciation is calculated for capital budgeting, because when depreciation is calculated for capital budgeting, salvage value is not deducted in calculating the depreciable base. The reason for that is that capital budgeting is concerned with cash flow, not accounting income. The income tax to be paid affects cash flow, and the income tax to be paid is affected by the depreciation used in calculating net taxable income on the income tax return.

On the other hand, this question is not about capital budgeting or cash flow. This question is about financial reporting and the calculation of depreciation for financial reporting. When the straight-line method of depreciation is used for financial reporting, salvage value is deducted to calculate the depreciable base.

Lynn

#244527

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Sudhish Karthiarath Charan
Participant

Thanks Lynn for the clarification.

Anything specific can be trace to differentiate such situation?

#244533

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Lynn Roden
HOCK international

Hello Sudhish Karthiarath Charan,

If you read the question and it is about cash flow for a capital budgeting question, then use the depreciation for the tax return. If you read the question and it is about depreciation for financial reporting, then use the financial accounting depreciation.

Lynn

#244542

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Sudhish Karthiarath Charan
Participant

Thank you very much Lynn..

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