A company has a periodic expense for depreciation of $150,000 a month. Its accumulated depreciation for the period ending December 31 of the year just ended is $18 million on capital assets of $55 million. Based on this information, what adjustment is need when calculating free cash flows?

Question

Quizplus · Accepted Answer

The adjustment needed when calculating free cash flows is the change in accumulated depreciation for the period. Since we only have information for the period ending December 31 of the previous year, we need to calculate the change in accumulated depreciation from that period to the current period. 
Current accumulated depreciation = $18 million (given)
Previous accumulated depreciation = unknown
Depreciation expense per month = $150,000 (given)
Number of months in the current period = unknown
Since we don't have all the information needed to calculate the change in accumulated depreciation, we cannot determine the exact adjustment needed. However, we know that the maximum adjustment possible is the total depreciation expense for the period, which is $150,000/month x 12 months = $1.8 million. Therefore, the best choice is C, which represents the maximum possible adjustment.

A Company Has a Periodic Expense for Depreciation of $150,000