Question

In: Accounting

7.If there is a change in an estimate of the salvage value and/ or useful life...

7.If there is a change in an estimate of the salvage value and/ or useful life of a company car, how would you calculate the change in the depreciation expense? Explain your answer and provide the formula you would use to solve this problem.

8.What is the difference between capital expenditures and revenue expenditures?

9.What is the difference between ordinary repairs and extraordinary repairs?

10.What is the formula to calculate depletion per unit? What are the steps to calculate the depletion expense?

11.What is an intangible asset? Provide an example of four intangible assets.

Solutions

Expert Solution

(7) Following steps must be followed to calculate change in the Depreciation Expense:

(a)Firstly, calculate the book value of the asset at the time of revision. Such Book value become the 'new cost' for further Calculation of depreciation expense.

(b) Secondly, Calculate how much of the 'new cost' will allocate over the new useful life, the same way if it would be a new asset. We can do it in the following way:

Remaining cost to be allocated = New Cost (i.e. old book value) - New salvage value

(c) Thirdly, calculate the period over which to allocate the remaining cost. This will be the remaining useful life of the asset that were not allocated to plus any additional years added when the estimation of the asset was revised.

(d) Finally, allocate the new cost over the asset's remaining useful life (including any revisions) using the depreciation method which the company follows.

Formula:

(Book value of Asset - new salvage value) ÷ (useful life - no. of years asset depreciated before revision + additional year)

(8) The capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time, whereas, the revenue Expenditures are for costs that are related to specific revenue transactions or Operating periods.

(9) Difference between ordinary repairs and extraordinary repairs:

Ordinary repairs Extraordinary repairs
The book value of the assets remain unchanged The book value of the asset changes i.e. it may increase the book value
It is recorded as expense. It is capitalised.

(10) Formula to Calculate Depletion per unit:

(Depletion base i.e. cost of natural resources - salvage value)÷ Total units to be recovered

Following are the steps required to Calculate the depletion Expense:

(a) Calculate net value of the cost of natural resource i.e. Cost - salvage value

(b) Now, Now multiply the net value of the cost of natural resource by the Units consumed during the period.

(c) Finally, divide the value (after the multiplication in part 'b') by the Estimated number of units.

(11) An intangible asset is an asset which does not have any physical existence. It is a long-term resource of an entity.

Examples: Goodwill, Trademarks, Copyright, patent etc.


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