Question

Acquisition and depreciation of long-term assets are important to understand because these assets represent a business's largest investment of resources. Recording the correct cost for an asset can be difficult because there are many costs associated with the purchase or construction of tangible property, and there are many legal fees associated with the purchase of real property. After assets have been acquired or constructed, they can be depreciated over a period of time. Depreciation is not meant to show the decline in the value of property. Depreciation refers to how the asset is used or charged over a period of time - its useful life. A company will record depreciation on the books in order to follow the Generally Accepted Accounting Principle (GAAP) Matching Principle. The matching principle occurs when expenses are matched to revenues. The revenue generated from the asset purchased is matched to depreciation expense.

Instructions Imagine you own or work for a business as you discuss the following information in a two three (2-3) page report (the two to three pages does not include the cover and reference pages):

1. Identify and describe your business (e.g. Clothing Store, Landscaping business, Delivery service, or Restaurant).

2. Provide two examples of long-term assets that the business owns.

3. Classify the asset (i.e. building, equipment, furniture & fixtures, etc.)

4. What depreciation method will you use to depreciate this asset? Explain Why.

5. How does depreciation affect the income statement and balance sheet?

6. Explain how depreciation might affect your decisions to purchase expensive equipment or real estate.

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

1. My business is that of a fast food restaurant.

2. The two examples of long term assets that I own are:

A) Restaurant building

B) Chairs , tables and couches

3. The classification of the assets is as follows:

Restaurant building-Building

Chairs, tables and couches-Furniture & Fixtures

4. The depreciation method I will use to depreciate the asset are as follows:

Building-

I would use the straight line method as a building is quite sturdy and will give equal amount of benefit for its expected life. Thus, even the depreciation should be equal.

Furniture-

I would use the declining balance method as furniture is very prone to wear and tear and its maximum revenue making capacity will be at the beginning of its expected life and thus depreciation should be higher at this time for the purpose of matching.

5. Depreciation is a charge to the income statements and lowers the profit. On the balance sheet, it is reduced from the asset value to arrive at the net asset value.

6. While making the decision to purchase an expensive equipment or real estate, I would be concerned about the fact that the depreciation charge will be too high for these assets and this would result in a low operating income. The revenues generated through these assets should make up for this high depreciation charge, otherwise it would not be useful to buy these assets.