# Whatisthebookvalueattheendof6thyear originalcost

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Unformatted text preview: beyond split-off beyond split-off beyond beyond @ \$.08 @ \$.08 \$.08 \$.08 Income effects Income effects Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Process Further and Sell as YA Difference \$30,000 \$30,000 \$80,000 \$80,000 \$50,000 \$50,000 – – \$30,000 \$30,000 40,000 40,000 \$40,000 \$40,000 40,000 40,000 \$10,000 \$10,000 Because the joint costs will not differ whether process further or not, they are irrelevant. We irrelevant We consider the separable costs and revenues beyond split-off point as relevant information. relevant From the analysis above, we note that the allocation of joint costs would not affect the decision and based on that, the decision is to process further product Y into YA. process Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Equipment Replacement: Keeping or replacing equipment:: Keeping or replacing equipment The book value of equipment is not a relevant The book value of equipment is not a relevant consideration in deciding whether to replace consideration in deciding whether to replace the equipment or not. the equipment or not. Because it is a past, and not a future cost.. Because it is a past, and not a future cost Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Book Value of Old Equipment Depreciation is the periodic allocation Depreciation is the periodic allocation of the cost of equipment.. of the cost of equipment The equipment’s book value (or net book The equipment’s book value (or net book value) is the original cost less accumulated value) is the original cost less accumulated depreciation. Accumulated depreciation is the depreciation. Accumulated depreciation is the sum of all depreciation expenses charged to past sum of all depreciation expenses charged to past periods. periods. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Example: Suppose a \$10,000 machine with a Example: Suppose a \$10,000 machine with a 10­year life span has depreciation of \$1,000 per 10­year life span has depreciation of \$1,000 per year.. year What is the book value at the end of 6th year? What is the book value at the end of 6th year? Original cost \$10,000 Original cost \$10,000 Accumulated depreciation (6 × \$1,000) 6,000 Accumulated depreciation (6 × \$1,000) 6,000 Book value \$ 4,000 Book value \$ 4,000 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Book value is called sunk cost (past cost, Book or historical cost): A cost that the company has already incurred, and therefore, is irrelevant to the decision making process. making However, past cost can be useful in predicting future costs. Also it can affect future payments for income taxes. In deciding whether to replace or keep existing equipment, we must consider the relevance of the following items: relevance Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh 1. 2. 3. 4. Book value of old equipment is irrelevant and thus depreciation on old equipment is irrelevant. Disposal value of old equipment is relevant because it is an expected future inflows that usually differs among alternatives. Gain or loss on...
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