Question

Question 4 15 Marks The board of directors of Telmot Instruments is having its Quarterly meeting. Accounting policies are on the agenda, depreciation is being discussed. A new Board member has some strong opinions. He is an environmental Engineer and argues that depreciation must be coupled with a fund to replace company assets, otherwise there is no substance to depreciation. He also challenges the 3-year estimated useful life the company is using to depreciate company computers. He notes that the computers will last 5 years. He argues for depreciating over 5 years instead of 3 years Pag Required: Explain the concept of depreciation and what is taken into consideration when determining estimated useful life of an asset

Answer 1

concept of depeneciation: ne fixed assets are long term assets. They help in production of goods & services. How ever, when an asset is in use, its value decreases due to the normal wear & tear, effe efflux of time &e obsolescence. This reduction in value of a fixed asset is known as deporeciation The main purpose of the concept of depreciation & its accounting is the allocation of the cost of a fixed asset. Depreciation expense donot involve any out flow of cash. The concept of depreciation Ee its accounting is the process of allocating or appostioning of the cost of fixed assets over their useful life. useful life of asset: calculating useful life of an asset is not an exact science. How ever it is important to make an accurate estimate as possible because useful life has a direct impact on how much an asset is exepensed in each accounting period. factors that can affect how long an asset is expected to be useful including & 1) usage: The more an asset is used the Quicker it will deteriorate 2) whether the asset is new (on second hand will affect the useful life.

3) Technological advances will have considerable effect on use feel life. If technology is rapidly changing the asset will become obsolete in short period of time 4) maintenance : If an asset is perodically no If maintenance on asset is performed at regular intervals, the useful life of asset generally increases also determine 5) working environment / conditions the useful life of asset.