Question

Question 4 15 Marks The board of directors of Telmot Instruments is having its Quarterly meeting. Accounting policies are on the agenda, depreciation is being discussed. A new Board member has some strong opinions. He is an environmental Engineer and argues that depreciation must be coupled with a fund to replace company assets, otherwise there is no substance to depreciation. He also challenges the 3-year estimated useful life the company is using to depreciate company computers. He notes that the computers will last 5 years. He argues for depreciating over 5 years instead of 3 years PBA4807 - Accounting for managers Page 13 of 16 © UNISA Graduate School of Business Leadership Required: Explain the concept of depreciation and what is taken into consideration when determining estimated useful life of an asset

Answer 1

Answer : Concept of depreciation

It is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used up. For example, companies can take tax deductiom for the cost of asset, meaning it reduces taxable income.

There are different types of depreciation methood:

1. Straight line method

2. Declining- balance depreciation method.

3 Written down value method.

4. Sinking fund method

5 Annuity method.

Factor Involving in determining the useful life of an asset:

1. The age of asset when purchased.

2. How frequently asset is used.

3. Environmental condition of the business that purchased the asset.

useful life of an asset can also be revised.