Assuming that Kathy chooses to keep Asset A and Asset B and sell and replace Asset C, evaluate her decisions. What decisions should she have made? Support your choices. b. How useful was the original cost of each asset in the evaluation of Kathy’s decisions? c. Assume that Kathy proceeds with her decisions. According to generally accepted accounting principles, at what dollar amount would each asset be carried on Yeagley’s balance sheet? What principles of financial accounting would be involved?
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.
Three years ago Yeagley and Sons purchased the three assets listed in the following table. The chief financial officer, Kathy Dillon, is presently trying to decide what to do with each asset. She has three choices for each asset: (1) sell it, (2) sell it and replace it with an equivalent asset, or (3) keep it. The following information is provided to aid her decision.
| Asset | Original Cost | Replacement Cost | Fair Market Value | Present Value of Future Cash Flows of Equivalent Asset | |
| A | 4000 | 1000 | 1500 | 2500 | 5000 |
| B | 1500 | 2000 | 500 | 2500 | 3500 |
| C | 2000 | 3500 | 3000 | 2500 | 5000 |
REQUIRED:
a. Assuming that Kathy chooses to keep Asset A and Asset B and sell and replace Asset C,
evaluate her decisions. What decisions should she have made? Support your choices.
b. How useful was the original cost of each asset in the evaluation of Kathy’s decisions?
c. Assume that Kathy proceeds with her decisions. According to generally accepted accounting principles, at what dollar amount would each asset be carried on Yeagley’s
sheet
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