Question

Explain the factors of depreciation for hotel buildings and justify each of these factors with case referred examples.

Answer 1

Depreciation is the amount of plant asset cost allocated to each accounting period benefiting from the plant asset’s use. Depreciation is a process of allocation, not valuation. Eventually, all assets except land wear out or become so inadequate or outmoded that they are sold or discarded; therefore, firms must record depreciation on every plant asset except land.

To compute the amount of depreciation expense, accountants consider four major factors:-

1. Cost of the asset.

2. Estimated salvage value of the asset. Salvage value (or scrap value) is the amount of money the company expects to recover, less disposal costs, on the date a plant asset is scrapped, sold, or traded in.

3. Estimated useful life of the asset. Useful life refers to the time the company owning the asset intends to use it; useful life is not necessarily the same as either economic life or physical life. The economic life of a car may be 7 years and its physical life may be 10 years, but if a company has a policy of trading cars every 3 years, the useful life for depreciation purposes is 3 years. Various firms express useful life in years, months, working hours, or units of production. Obsolescence also affects useful life. Example, on TV you may have seen a demolition crew setting off explosives in a huge building (e.g. The Dunes Hotel and Casino in Las Vegas, Nevada, USA) and wondering why the owners decided to destroy what looked like a perfectly good building. The building was destroyed because it had reached the end of its economic life. The land on which the building stood could be put to better use, possibly by constructing a new building.

4. Depreciation method used in depreciating the asset.