Quiz 9: Accounting for Depreciation and Income Taxes

Business

Depreciation: Depreciation refers to decrease in the value of asset over the period of time. In order to maintain the asset with the same condition (Avoid the reduction in the asset value) firm has to incur some cost equal to depreciation value. a.Purchase of land: To maintain the land for the present use over the years it requires some maintenance cost. Thus, it involves depreciation. b.Purchase of coffee machine: To maintain the coffee machine's efficiency at same level over the years, it requires maintenance cost. Thus, it involves depreciation. c.Installing conveyor system: Conveyor system is the part of the system which can be considered as the spare parts of the system. It does not require any maintenance cost. If the spare parts not working properly, then it will be replaced. Thus, it does not involves depreciation.. d.Painting the building: Painting the building is kind of maintenance cost. Thus, it does not involve depreciation : e. Repaved the parking lot: Re paved the parking lot is considered as an asset. It requires the maintenance cost to maintain its present level of use over the year. Thus, it involves depreciation. f. Installing water purifier: Water purifier requires maintenance cost to keep its efficiency level remain same over the years. Thus, it involves depreciation. g. Purchase of spare parts: Spare parts do not require any maintenance cost.. If the spare parts not working properly, then it will be replaced. Thus, it does not involve depreciation. h. Lease payment for truck: Truck requires maintenance cost to keep its efficiency same level over the six month period. Thu s, it involves depreciation. i. Purchase of patent: Patent does ot requires any maintenance cost. Thus, it does not involve depreciation.

Given information: • Price of machine is $45,000. • Salvage value is $5,000. • Depreciation period is 4 years. • Time period is 2 years. Book value: Book value can be calculated by using the following formula. img …… (1)Substitute the respective values in Equation (1) to calculate the book value at the end of year 2. img img Book value at end of the year 2 is img . Hence, option (d) is correct.

Given information: • Price of machine is $5,000. • Book value after 4 year is $1,300. • Machine can be sold at the value of $2,300 after 4 years. • There is no salvage value if the machine is used for 3 more years. • Double decline balance method is used for depreciation. • Time period is 2 years. Economic loss for first four years: Economic loss can be calculated by using the following formula. img …… (1)Substitute the respective values in Equation (1) to calculate the economic loss for the first 4 years. img Economic loss at end of the year 4 is img . Economic loss for three more years' usage: Substitute the respective values in Equation (1) to calculate the economic loss for 3 more years. img Economic loss for 3 more years is img .