On December 31, 2021, Alexis Company has an item of machinery with a cost of P4,500,000 and an accumulated depreciation of P1,800,000. On this date, the machinery is found to be impaired due to obsolescence and a major physical damage. At the date of its acquisition, this machinery has an estimated useful life of ten years and was depreciated using the straight line basis. The entity made an assessment and test for recoverability of the asset and determined that the machinery’s fair value is P2,500,000 and estimated disposal cost is P250,000. The entity expects net future undiscounted cash flows related to the continued use and eventual disposal of the machinery of P2,600,000. The net future discounted cash flows related to the continued use and eventual disposal of the machinery using a discount rate of 10% is P2,180,000. How much is the depreciation expense of this machinery for the year ended December 31, 2022?
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.
11.On December 31, 2021, Alexis Company has an item of machinery with a cost of P4,500,000 and an
The entity made an assessment and test for recoverability of the asset and determined that the machinery’s fair value is P2,500,000 and estimated disposal cost is P250,000. The entity expects net future undiscounted cash flows related to the continued use and eventual disposal of the machinery of P2,600,000. The net future discounted cash flows related to the continued use and eventual disposal of the machinery using a discount rate of 10% is P2,180,000.
How much is the depreciation expense of this machinery for the year ended December 31, 2022?
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