On January 1, 2022, Blessed is uncertain that the process can actually be made economically feasible, and decides to write down the patent. The future cash inflows expected from the patent will be P40,000 per year for the remaining life of the patent. The present value of these cash flows, discounted at 12% market interest rate, is P144,200. The fair value less cost to sell is P130,000.
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.
On January 1, 2020, Blessed Company purchased a Patent for P280,000. The asset has a legal life of 10 years
but due to rapidly changing technology, Blessed estimates a useful life of only 7 years. On January 1, 2022,
Blessed is uncertain that the process can actually be made economically feasible, and decides to write down
the patent. The future
the patent. The present value of these
value less cost to sell is P130,000.
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