Depreciation and Sale of Asset

967 Words Oct 1st, 1999 4 Pages
Depreciation is the decline in the future economic benefits of a depreciable non-current asset through wear and tear and obsolescence. It is an allocation process. It can be calculated by two main methods, each reflecting in a distinct prospect in the way the asset is used. Depreciation is to be treated as an estimated expense that does not set aside cash for the replacement of a non-current asset. In determining the cost of acquisition of the lathes, any capital expenditure made must be added to the purchase price of the lathes. This amount will be considered as the historical cost and will be used in calculating the depreciation expense Depreciation is the allocation of the cost of a non-current asset less its estimated …show more content…
This expenditure is known as capital expenditure and is usually of a once-off nature. Examples of capital expenditure are, upgrading machine parts of the lathes to achieve an improvement in the quality or productivity of the output. Another type of expenditure that can be made is revenue expenditure. Revenue expenditure is expenditure on assets that contribute to the revenue earning capacity, but will be used up within an accounting period. This expenditure is not added to the asset value but deducted from the revenue to find the profit. Examples of revenue expenditure include, advertising of a manufacturing business any repairs made to non-current assets, in this case the lathes. To calculate the cost of the acquisition of the lathes, the capital expenditures that are made, need to be added to the purchase price of the lathes. These expenditures may include importing the lathes into the country, installation expenses and any other costs that occur which will contribute to the future economic benefit of the business for more than one accounting period. To conclude, W. Wally should use the reducing balance method to depreciate his lathes as they will contribute more in their earlier years and should therefore have more of their cost allocated in the early years. He should be aware that depreciation is a process of
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