In the production of beer, a final filtration is accomplished by the use of kieselguhr, or diatomaceous earth, which is composed of the fossil remains of minute aquatic algae a few microns in diameter, and pure silica. A company has purchased a property for $840,000 that contains an estimated 60,000 tons of kieselguhr. Compute the depreciation charges for the first 3 years, given that production (or extraction) of 3000 tons, 5000 tons, and 6000 tons is planned for Years 1, 2, and 3, respectively. Use the cost-depletion methods, assuming no salvage value for the property.
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.
In the production of beer, a final filtration is accomplished by the use of kieselguhr, or diatomaceous earth, which is composed of the fossil remains of minute aquatic algae a few microns in diameter, and pure silica. A company has purchased a property for $840,000 that contains an estimated 60,000 tons of kieselguhr. Compute the
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