EH0919998.docx - ACT507 S2 2016 Assignment 1 Problem 1 a Firms are free to use the method of depreciating their long term assets However the methods

EH0919998.docx - ACT507 S2 2016 Assignment 1 Problem 1 a...

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ACT507 S2 2016 Assignment 1 Problem 1:
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a. Firms are free to use the method of depreciating their long term assets. However, the methods which used more by firms are either straight line method or double declining balance method. Straight line method of deprecation Under this method of charging depreciation, the amount of depreciation is charged remain approximately the same throughout the life period of the firm. This method is more appropriate when the benefits form the use of the assets is seen to be realizable over the life period of the asset. Also the method can be sued when other reliable estimations are not available regarding the asset and an equal charge is made. The amount of depreciation is the original cost of the assets acquired divided by the expected life period of the asset[ CITATION Jos13 \l 1033 ]. Double declining balance Method Unlike straight line method of charging depreciation, the double declining balance method allows the accountants to charge 200% of the amount which is charged under the declining balance method. So essentially the method is an accelerated method. Under this method a company or an organization can charge double depreciation to recoup the amount of investment made in long term assets in a short period of life. The total amount of deprecation under this method would be same as under the above method but higher depreciation would be charge under earlier years. This means the tax paid would be lower in earlier years than the straight line method and higher in the later years[ CITATION Wey14 \l 1033 ]. b. Depreciation is shown in each of the three financial statements prepared by a firm. First of all, the amount of deprecation charged by a firm is shown as an expense in the income statement. As deprecation charge is an operating expenses the same is allowed to be deducted from the revenue or gross income to arrive at profit before interest and tax. This means the regulations allow depreciation to be recouped so that the entity would be able to replace the asset when required by investing the same in a sinking fun or similar other funds as per the requirements of the organization.
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The amount of depreciation expense is deducted form the gross amount of fixed assets to show the net assets remaining at the end of the year. This allows the investors and stakeholders to forma n opinion of the firms gross and net assets[ CITATION Atr13 \l 1033 ]. Finally, the deprecation expense is also included in the firm’s year end cash flows statement.
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  • One '19
  • Thomas Diefenbach

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