Question

At the beginning of the year, Patrick Company acquired a computer to be used in its operations. The computer was delivered by the supplier, installed by Patrick, and placed into operation. The estimated useful life of the computer is five years, and its estimated residual value is significant.

After reading the above prompt, respond to the following:

What costs should Patrick capitalize for the computer?

What is the objective of depreciation accounting?

What is the rationale for using accelerated depreciation methods?

Answer 1

What costs should Patrick capitalize for the computer : Cost which is incurred till the time computer put to use for business can be capitalized. In our example purchase cost, transport cost (if any) and installation cost (if any) is allowed to be capitalized. Later depreciation can be claimed for 5 year.

What is the objective of depreciation accounting : Objective of depreciation accounting is based on premise of matching concept for which cost and revenue should relate to the period for which its used. Generally fixed asset, plant, machinery, equipment, computer etc. used for more than one year and it will be unfair to charge cost in a year in which assets are being purchased. Depreciation allow these asset cost to get charged in profit and loss account in a systematic way over the life of asset.

What is the rationale for using accelerated depreciation methods: There are some asset whose value get reduced faster in initial year (Example technology oriented asset like computer, laptop etc). Accelerated depreciation method allow higher depreciation in initial year and lower depreciation at later years of asset life.