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.

Required: Explain the concept of depreciation and what is taken into consideration when determining estimated useful life of an asset

Answer 1

Concept:

Depreciation is a method by which value of an asset is decreased based on its usage,life of the asset.Usually company depreciates value of an asset based on its estimated life.

Estimated life is either specified in the Indian Companies Act or an expert opinion can be used for depreciating the asset .

In the given case,New board member approach in creating a depreciation fund could be benefical for company,as after the asset gets fully depreciated company will have funds to replace the asset.

Based on the given case,the new member is an environmental engineer and it is assumed that he possesses knowledge of the asset, and considering him as an expert his opinion of considering asset life 5 year instead of 3 years can be considered and asset can be depreciated in 5 years.