Question

Huckle Corporation owns just one piece of manufacturing machinery. Each year, the firm sets aside an amount of cash equal to the depreciation expense on that machine. When the machine is completely depreciated, Huckle plans to use the money in the cash fund to buy a new machine. What must happen in order for Huckle to carry out this plan?

A. Equipment prices must rise throughout the life of Huckle's current machine.
B. Equipment prices must remain reasonably constant during the life of Huckle's current machine.
C. Huckle must use the retirement depreciation method.
D. Huckle must use an accelerated depreciation method.

Answer 1

Huckle Corporation must ensure that equipment prices remain reasonably constant during the life of their current machinery to successfully use their depreciation funds to replace it. The depreciation method chosen doesn't impact this ability; it is the constancy of equipment costs that matters. Option B is correct.

Step-by-step explanation:

In order to carry out its plan of using cash set aside each year equal to the depreciation expense to purchase a new piece of manufacturing machinery when the current one is completely depreciated, Huckle Corporation must ensure that equipment prices must remain reasonably constant during the life of Huckle's current machine. The value set aside from the depreciation expense reflects the historical cost of the equipment, not future prices. If equipment prices rise significantly over the life of the current machine, the cash fund may not be sufficient to cover the cost of a new machine.

The choice of depreciation method, whether it is the retirement or accelerated method, does not affect Huckle's ability to replace the machine; rather, the key factor is that the cash saved matches the cost to replace the machinery at the end of its useful life. Hence, the correct answer is B. Equipment prices must remain reasonably constant during the life of Huckle's current machine.