A company is planning to purchase a machine that will cost P240,000, have a six-year life, and be depreciated over a six-year period with no salvage value. The company expects to sell the machine's output of 30,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine? Sales Costs: P 900,000 Manufacturing P 520,000 Depreciation on machine 40,000 Selling and administrative expenses 300,000 (860,000 ) Income before taxes P 40,000 Income tax (25%) (10,000 ) Net income P 30,000
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A company is planning to purchase a machine that will cost P240,000, have a six-year life, and be
Sales Costs: P 900,000
Manufacturing P 520,000
Depreciation on machine 40,000
Selling and administrative expenses 300,000 (860,000 )
Income before taxes P 40,000
Income tax (25%) (10,000 )
Net income P 30,000
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