Question

Fixed Asset Discussion:

1. Identify a type of company in your pathway that might purchase fixed assets (see suggestions below).
2. List 5 fixed assets that they might purchase to run their business.
3. Select one depreciable fixed asset. Based on research suggest what the cost, residual value and estimated life might be for that fixed asset.
4. Using your assumptions above, calculate:
   1. Straight-line depreciation and book value for each of the first two years
   2. Declining Balance depreciation and book value for each of the first two years
   3. Units of Production depreciation (make assumptions about the first two year’s use), and book value for each of the first two years.
5. Suggest which depreciation method might be more appropriate and why.

Answer 1

SOLUTION:-

a).The company selected for solving this problem is a sweater manufacturing company.

some of the fixed assets that they might purchase to run their business are :-

1. Vehicles such as company trucks

   2.Office furniture

3.Machinery

4.Buildings

5.Land.

b).

The fixed asset buiding is selected for calculations

deatils suggested based on the research are as follows:

cost of machinery $100000

residual value $4000

estimated life 4 years

estimated units of production in whole life 20 million units

units of production in years:

year 1 = 7M

year 2 = 5.5M

year 3 = 4.5M

year 4 = 3M

c).  Depreciation and book value calculation

1. Straight line method

Straight line derpeciation rate = 1/ number of useful life

=1/4

=25%

FORMULA ( Cost Of Asset-Salvage Value) / Useful Life Of Asset

Where:

• Cost of the asset is the purchase price of the asset
• Salvage value is the value of the asset at the end of its useful life
• Useful life of asset represents the number of periods/years in which the asset is expected to be used by the company.

here,

  Cost of the asset =   $100000

Salvage value = $4000

Useful life of asset = 4 years

therefore ($100000-$4000)/4

=$96000/4

= 24000 each  year

  

year	Depreciation Expense	Book value
1	$24000	$76000
2	$24000	$52000

2). Declining Balance depreciation method

Declining Balance Method of Depreciation also called as reducing balance method where assets is depreciated at a higher rate in the intial years than in the subsequent years. Under this method, a constant rate of depreciation is applied to an asset’s (declining) book value each year. This method results in accelerated depreciation and results in higher depreciation values in the early years of the life of an asset.

Declining Balance depreciation rate = acceleration rate * Straight line derpeciation rate

= 2(assumed) value * 25%

= 50%

equation for calculating Declining Balance depreciation =

book value of the asset at the beginning of the year * Declining Balance depreciation rate

Year	Depreciation	Depreciation	Value at the end of the year
1	$100000 * 50%	$50000	$50000
2	$50000 * 50%	$25000	$25000

3).Units of Production depreciation method

The preceding depreciation methods are based on time. The units-of-production method is based on actual physical usage of the asset during a given period. Under the units-of-production method, an estimate is made of the number of units the asset will be able to produce over its useful life. The depreciation rate per unit produced is calculated as the cost less the estimated salvage value divided by the estimated number of units to be produced over the asset’s estimated useful life.

Depreciation Rate = Cost Less Salvage Value / Estimated number of units to be produced by the asset over its   estimated useful life

here,

  Cost Less Salvage Value= $100000-$4000

=$96000

Estimated number of units to be produced by the asset over its   estimated useful life = 20M

therfore, Depreciation Rate = $96000/ 20M

= 0.0048‬ per unit

Depreciation = Depreciation Rate * number of units produced

Year	units produced	Depreciation	Depreciation	Value at the end of the year
1	7M	7M * 0.0048	$33600	$66400
2	5.5M	5.5M * 0.0048	$26400	$40000

d). I suggest Straight line depreciation because it is the simplest depreciation method to apply, results in fewer errors and stays the most consistent. it can be properly when an asset's value declines evenly over time.
generaly The depreciation method a company should use is the one that best matches the recognized depreciation charge with the revenue management expects to receive from the asset. The method of depreciation should not be selected on the basis of which method will result in a desired net income amount.