Prophet Manufacturing Limited was organized on January

1 2014 During #2181

Prophet Manufacturing Limited was organized on January 1, 2014. During 2014, it used the
straight-line method of amortizing its plant assets in its reports to management.As the
company's controller, on November 8 you are having a conference with Prophet's officers to
discuss the depreciation method to be used for income tax and for reporting to shareholders.
Fred Peretti, president of Prophet, has suggested using a new method that he feels is more
suitable than the straight-line method for the company’s current needs during what he foresees
will be a period of rapid expansion of production and capacity. The following is an examplein
which the proposed method is applied to a capital asset with an original cost of $248,000, an
estimated useful life of five years, and a residual value of approximately $8,000:The president
favours the new method because of the following claims that he has heard about it:1. It will
increase the funds that are recovered during the years near the end of the assets' useful life
when maintenance and replacement disbursements are high.2. It will result in increased
writeoffs in later years when the company is likely to be in a better operating position.
InstructionsDraft a response to Fred Peretti that explains the purpose of depreciation, and
whether the method that has been suggested qualifies as a generally accepted accounting
method. Identify the circumstances, if any, that would make using the method reasonable and
those, if any, that would make using it unreasonable. Also respond to his statement that
depreciation charges recover or create funds.View Solution:
Prophet Manufacturing Limited was organized on January 1 2014 During

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