Question

• Discuss the three most common depreciation methods used in business practice. Why would a company choose one method over another? Why might a company choose to depreciate some assets using one method and another method for others? Why is recording depreciation and choosing the appropriate method an important topic for businesses to consider?
• Intangible assets can add significant value to a companies balance sheet. What are some common intangible assets? How do they add value to a company? Why are some intangible assets amortized and others are not?

Answer 1

Discuss the three most common depreciation methods used in business practice?
The most common depreciation method used by the company are:
1. Straight-line method
2. Accelerated depreciation method.
3. Double declining balance method.
4. Sum of the year digits method.

Why would a company choose one method over another?
Company will choose what is appropriate based upon the nature of the asset.

Why might a company choose to depreciate some assets using one method and another method for others?
If a machine has the same production capacity throughout its life then the straight-line method is used. If a machine production capacity is higher during the initial period and decreases gradually then accelerated depreciation method is used.
It depends upon the nature of the machine (assets)

Why is recording depreciation and choosing the appropriate method an important topic for businesses to consider?
Because it helps in preparation of true and fair view Financial statements. It helps the company to allocate costs (overhead costs) to its products.

Intangible assets can add significant value to a companies balance sheet. What are some common intangible assets?
1. Goodwill
2. Patents
3. Franchises agreements.
4. Copyrights.
5. Trademarks.

How do they add value to a company?
They add value either in inform of exclusive rights, power, reputations. Intangible assets sometimes create a virtual barrier between the company and its competitors, so that competitors cannot imitate the company and gain the same amount of profits.

Why are some intangible assets amortized and others are not?

Intangible assets like Goodwill cannot be accurately measured. Hence they cannot be amortized.

Where was intangible assets like franchise agreement can be readily measured and they can be amortized.