Question

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1. Explain the concept of capitalization or capitalized? Include what type of costs might be included ?3 2. Explain the concept of depreciation? 5 3. Describe the 3 months of depreciation and provide 3 examples of industries that might use each method? 5 4. Charles Inc, manufactures beauty supply equipment A review of its books for October revealed the following 5 cost of equipment 500,000 useful life+ 10 years residual at the end of service life 75,000. Total hours to be run on equipment 125,000 Year 1 +7,000 hours year 2= 10,000 hours Given the above what is accumulated depreciation at the end of year 2 for each method.

Answer 1

1) Capitalization concept is the valuation of the business. It includes the long term assets and liabilities brought forward/taken to the future years. It is adopted towards the accounting method where the cost of fixed assets or assets which are use over a year is included in the PPE section of balance sheet and used over the useful life of the assets instead of expensing the cost in the year of incurring.

2) The concept of depreciation is the considering the reduction in the value of the assets taken as expense in the year of use. The assets which are capitalized and taken to PPE section of balance sheet and used over their useful life of the assets and value of the assets is used as expense over the years according to the percentage of use in any particular year.

3)The three methods of depreciation are a) Straight line or constant amount depreciation method, b) Diminishing Balance Method or Rapid depreciation method, c) Units of production based depreciation method. These are the commonly used method of depreciation in the Textile industry, Steel industry, manufacturing industries like cycle, motors, equipment, etc.

4)

Depreciable cost	cost - salvage	500000-75000= 425000
Total hours during the life years		125000
depreciable cost per hour		3.4
Depreciation for year 1	7000*3.4=	23800
Depreciation for year 2	10000*3.4=	34000
Total Accumulated Depreciation		57800