A company buys a £300 computer in Year 1 and capitalizes the expenditure. Th e computer has a useful life of three years and an expected salvage value of £0, so the annualdepreciation expense using the straight-line method is £100 per year. Compared to expensing the entire £300 immediately, the company’s pretax profit in Year1 is £200 greater.1. Assume that the company continues to buy an identical computer each year at thesame price. If the company uses the same accounting treatment for each of the computers, when does the profit-enhancing eff ect of capitalizing versus expensing end?2. If the company buys another identical computer in Year 4, using the same accounting treatment as the prior years, what is the eff ect on Year 4 profits of capitalizingversus expensing these expenditures?
A company buys a £300 computer in Year 1 and capitalizes the expenditure. Th e computer has a useful life of three years and an expected salvage value of £0, so the annual
1. Assume that the company continues to buy an identical computer each year at the
same price. If the company uses the same accounting treatment for each of the computers, when does the profit-enhancing eff ect of capitalizing versus expensing end?
2. If the company buys another identical computer in Year 4, using the same accounting treatment as the prior years, what is the eff ect on Year 4 profits of capitalizing
versus expensing these expenditures?
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