Financial Accounting and Reporting/Cost Allocation

Depreciation Definition Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is treated as an expense for the period incurred, and is accumulated for the whole useful life of an asset as a contra-account to a specific PPE account. The proforma entry is: General xx 20xxxxx xx Depreciation Expense xxx Accumulated Depreciation xxx Depreciation Methods Basic Formula Depreciation expense is calculated based on the depreciable amount (D) and not on the actual cost of the asset, i.e.,, where D is the difference between the Original Cost (C) and the Scrap Value (S) or . Straight-line method The straight-line method is based on the following assumptions; The asset wastage is a function of time and independent of usage, i.e., The wastage is constant or linear. Consider the following illustration: ABC Co. has a $30,000 threshold for capitalization of assets. As a policy, any asset acquired for less than $30,000 are expensed immediately. The company reported the following purchases related to PPE for the year: ItemPurchase dateList PriceTrade discountCash discountTaken?Fair value at yeat end of current period65EJanuary 3154,000none3%no75,00065FMarch 1515,70010%2%no13,20065GApril 146,470nonenonenone49,00065HJune 154,599none1%yes3,00065ISeptember 1100,000none3%yes104,00065JNovember 3048,0002%2%yes43,000Land acquired for capital appreciationNovember 30540,000n/an/anone562,000 Prior to this, the company reported the following amounts in their previous year's financial statements; AccountCostFair Value at year-end of current periodAccumulated DepreciationScrap valueUseful life remainingLand on operating lease549,000760,000n/an/an/aBuilding on operating lease2,590,0001,543,000325,00020% of cost15 yrsBuilding on finance lease2,490,0003,209,000126,00015% of cost10 yrsBuilding used as headquarters23,500,00012,040,0005,450,00012% of cost16 yrs Depletion Amortization