Reference no: EM132950670

Effects of changes in estimates on depreciation expense. At the end of each year, Patty Chu, the chief accountant at Rex Lin Enterprises, aSingapore-based trading company, review s long-term assets at the end of each year todetermine whether changes are called for in how these assets are deprecia ted. In December2011, her attenti on focused on two assets in particular:Date acquired CostAccumulated depreciationend of 2011 Useful life Residual valueWarehouse 1/1/07 $200,000 $50,000 25 years $10,000Building 1/1/06 1,600,000 228,000 40 years 100,000Patty is proposing the following changes:For the warehou se: a decrease in the useful life to 20 years, and a decrease in residualvalue to $6000.For the building: an increase in the useful life to 50 years, and a decrease in the residualvalue to $55 000.Before agreeing to the changes, Patty's bosses would like to know what the deprecia-tion charges will be for each asset if the changes are adopted. All assets are depreciatedusing the straight-line method.292 CORPORATE FINANCIAL REPORTING AND ANALYSIS10.6 Interpreting disclosures for property, plant and equipmentPetrobras, which operates in the ene rgy sector, is Brazil's largest company. Its shares tradeon several of the world's leading stock exchanges. A portion of Petrobras' balance sheet, itsincome statement.

Problem (a) What portion of Petrobras "Equipment and other assets" had been "used up" by theend of ?scal 2008?

Problem (b) How many years are left in the lives of Petrobras'"Equipment and other assets," onaverage? State clearly any assumptions that you make in arriving at your estimate.

Problem (c) Suppose that Petrobras assumes a zero salvage value for their "Equipment and otherassets." For each $100 in new asset investments, what is the annual amount ofdepreciation expense charged to the income statement?

Problem (d) Suppose that other leading energy companies charge $12 in depreciation expense foreach$100 invested in new equipment. Are Petrobras' depreciation policy assump-tions materially different from those of their competitors? Support your answer.

Problem (e) What line item on Petrobras' income statement is most affected by their depreciationpolicy? Explain why.

Problem (f) Aside from comparing Petrobras' depreciation policy assumptions to those of theircompetitors, what oth er "red ?ags" might one look for in order to assess whetherPetrobras is overly conservative or overly aggressive in taking depreciation expenses?Is there any evidence of these issues on Petrobras' ?nancial statements?