Discussion week 5

Discussion week 5 - A company can select the method to use...

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Discussion week 5 Costs of an asset can be capitalized by a company when the asset is owned or controlled by the company, meaning they have title to the asset as provided in purchase contract and the company expects to obtain future benefits from it (future cash flow). When those circumstances are met the capitalization can be recorded on the balance sheet. (Easton, Halsey, McAnally,Hartgraves & Morse, 2010) According to Easton et al, 2010 as the asset is used over a period of time it goes through a process known as depreciation where the cost is systematically transferred as an expense to the income statement matching the asset’s cost to the revenue generated by it. The useful life of the asset, its salvage value and the depreciation rate are estimated in the process in order to determine the asset’s loss of value during that period of time.
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Unformatted text preview: A company can select the method to use when registering depreciation. The most popular method is the double declining balance method where the depreciation base is net book value and it starts declining at a fast rate. There is also the straight line method where the expense is recognized evenly during the assets useful life span at a slower rate if compared to the double declining balance method. (Easton et al, 2010). Most companies selection of method depends on whether it is for financial reporting purposes (SL method) or for tax returns using the double declining balance method (Easton et al, 2010). References: Easton, P. D., Halsey, R. F., McAnally, M. L., Hartgraves, A. & Morse, W. J., (2010). Financial & Managerial Accounting for MBAs. Canada: Cambridge Business Publishers, LLC....
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