Lee, a programmer, earned P350,000 in 2010, but in 2011, he began to manufacture computer monitors. After one year, he submitted the following data to his accountant. • He stopped renting out his cottage for P35,000 a year and used it as his factory. • The market value of the cottage increased from P700,000 to P710,000. • He spent P50,000 on materials, phone, utilities, etc. • He leased machines for P100,000 a year. • He paid P150,000 in wages. • He used P100,000 from his savings account, which pays five 5% interest a year. • He borrowed P400,000 at 10% a year from the bank. • He sold P1,600,000 worth of monitors. • Normal profit is P250,000 a year.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Lee, a programmer, earned P350,000 in 2010, but in 2011, he began to manufacture computer
monitors. After one year, he submitted the following data to his accountant.
• He stopped renting out his cottage for P35,000 a year and used it as his factory.
• The market value of the cottage increased from P700,000 to P710,000.
• He spent P50,000 on materials, phone, utilities, etc.
• He leased machines for P100,000 a year.
• He paid P150,000 in wages.
• He used P100,000 from his savings account, which pays five 5% interest a year.
• He borrowed P400,000 at 10% a year from the bank.
• He sold P1,600,000 worth of monitors.
• Normal profit is P250,000 a year.
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