Question

Every year, Hercules Inc. has invested an increasing amount in manufacturing equipment. Given that there are a large number of relatively inexpensive machines and all the machines have relatively similar useful lives, Hercules has depreciated the machinery as a group at a uniform rate using the straight-line method. Over time, the ratio of the group's total accumulated depreciation to the total cost of the machinery has increased steadily. Currently, the ratio stands at 0.75 to 1. What is the most likely reason for this increasing ratio?

A. The estimated average useful life of Hercules' machinery is less than its actual average useful life.
B. The estimated average useful life of Hercules' machinery is greater than its actual average useful life.
C. Hercules has been retiring fully depreciated machinery that should have remained in service.
D. The estimated average useful life of Hercules' machinery is equal to its actual average useful life.

Answer 1

The increasing depreciation-to-cost ratio at Hercules Inc. most likely occurs because the machinery's estimated useful life is set longer than its actual useful life, leading to a higher accumulated depreciation. Option B is correct answer.

Step-by-step explanation:

The increasing ratio of total accumulated depreciation to the total cost of machinery could result from the estimated average useful life of Hercules Inc.'s machinery being greater than its actual average useful life. This means that Hercules Inc. depreciates its machinery over a longer period than it actually should, resulting in a yearly increase in the depreciation expense without a corresponding increase in the investment in new machinery. As the older equipment continues to be used without adequate replacement, the proportion of accumulated depreciation to total cost grows, hence the ratio becomes steeper over time.