Question

1. You buy an asset with a purchase price of $5,000 and your shipping is $1,000. It has a 3 year class life. Show a depreciation schedule below that includes both the depreciation each year and the book value each year.
2. If the working capital changes in number 1 are a negative $500 show the depreciation schedule.

Answer 1

CASE 1:

Purchase price of the asset = $5,000

Shipping cost = $1,000

As total cost of asset includes original cost of the asset and transportation, the total cost would be $6,000.

Total cost of the asset = Purchase price of the asset + Shipping cost = $5,000 + $1,000 = $6,000

Depreciation per year = Total cost of the asset / no. of years of life = $6,000 / 3

Depreciation per year = $2,000

	Book value of the asset at year beginning	Depreciation	Net book value of the asset at year ending
Year 1	$6,000	$2,000	$4,000
Year 2	$4,000	$2,000	$2,000
Year 3	$2,000	$2,000	-

Therefore, the depreciation for the year 1, 2, and 3 = $2,000

Book value at the end of year 1 = $4,000

Book value at the end of year 2 = $2,000

Book value at the end of year 3 = NIL

CASE 2:

If the net working capital changes in number 1 (assuming year 1) are negative $500 the the depreciation would remain the same as in the CASE 1.

Because working capital is a metric that has a relationship with current assets and current liabilities but not with the fixed assets and depreciation. Hence the depreciation schedule would remain the same.