Question

Select 2 types of capital assets in a business (buildings, computers, etc.) and suggest the best method to use for depreciation. Why did you make the selection for each type and what are the related benefits? (Please answer in details)

Answer 1

Q: Take 2 Assets and suggest the best method to use for depreciation.

Answer :

Furniture - Straight Line Method of Depreciation.

The straight line basis of depreciation is the most commonly used method of depreciation.This can be used for the furniture because it is the simplest depreciation method to apply. You take the asset's cost, subtract its expected salvage value, divide by the number of years it's expect to last, and deduct the same amount in each year.

Benefits of Straight Line Method

• Depreciation using the straight-line method reflects the consumption of the asset over time.
• It is suitable for assets that operate uniformly and consistently over the life of the item.
• The company can claim the same amount of depreciated money for tax saving each year.
• For small business and assets having small residual value this is the best method as it is so simple.
• The total amount of depreciation can be known easily by multiplying the yearly amount of depreciation with the total number of the years the asset is under use.

Air Conditioner - Written Down Value Method

Written down value method is also most commonly used method of depreciation. Written down value or the reducing balance method of depreciation is a method in which depreciation is calculated at a fixed percentage on the original cost in the first year. However in the subsequent years, depreciation is calculated at the same fixed percentage not on the original cost but on the written down values gradually reducing during the expected working life of the Asset due to charge of depreciation.

Benefits of Written Down Value Method

• The amount of depreciation is higher in the earlier years when the machine is efficient and the cost of repairs is low. In later years amount of depreciation becomes lower and the amount of repairs increase due to extended use and wear & tear of the air conditioner. Thus the total charge for depreciation and repairs together remains more or less uniform over the years. This helps in eliminating huge variations in annual profits or losses.
• This method takes care of the obsolescence problem related to the assets as the major part of depreciation is charged in the earlier years. Due to this feature replacement of the assets before the end of its estimated useful life becomes easy and feasible.
• It results in a better cash flow through tax deferral as under this method, the net income to be taxed is lower in the initial years and higher in subsequent years.