Question

QUESTION 2 [10 MARKS] 2.1 Discuss critically the challenges for a small business of calculating fixed asset depreciation. (5) 2.2 What is residual value, and how does it differ from the estimated useful life of an asset? (5)

Answer 1

A. Challenges for small business for calculating of fixed asset depreciation are as follows-

I. Lack of adequate resources and lack of adequate management in order to estimate the value of assets in the long run.

II. Improper estimations of life of the Asset and improper computation of accounting depreciation in synchronisation with tax base.

III. Small company generally have an existence crisis and their assets may be having a higher life than the company's life so they are sometime having a problem of proper identification of of life of asset in advance.

IV. There is a high amount of cost which are related to ascertainment of receivable amount and realizable values so it will not be easily estimated.

B. Residual value is the value of asset after it has been used during its lifetime and it is the the disposable value of the Asset after the asset is fully utilised during his lifetime.

it will be different from estimated life of the asset because estimated life of the Asset will be continuously readjusting itself and they are not the actual life of the Asset and assets can even be used more than their life sometimes, so it is not easy to compare their residual value in response to change in there uses in the lifetime.