Capitalization and Depreciation
Gehl Company purchased significant amounts of new equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Gehl, and placed into operation. Gehl purchased some for cash with discounts available for prompt payments. It purchased some under long-term payment plans, for which the interest charges approximate prevailing rates. In addition, Gehl disposed of some equipment that it had purchased in a prior year. As a result, Gehl is studying its capitalization and depreciation policies.
Required:
1.
Identify the cost that should be capitalized by Company G for the current year.
Capitalized costs:
Capitalized costs are considered as the part of fixed assets instead of stating them as expenses during the period in which they are incurred and capitalized costs are identified over a period of time through amortization or depreciation of fixed asset.
The expenditure that is necessary to obtain the equipment is treated as capitalized cost. It includes net acquisition of equipment, and the net acquisition cost of equipment is calculated as follows:
2.
Identify the factors that would cause the equipment to lose its future economic benefits.
3.
Explain (a) the objectives of depreciation accounting, and (b) the factors that should be considered in computing the equipment’s depreciation expense.
4.
Explain the theoretical justification for the use of accelerated depreciation method.
5.
Explain the manner in which Company G should report the disposal of the automobile.
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