On January 2, 2004, Salonga Company purchased a large quantity of personal computers. The cost of these computers was P5,000,000. On the date of purchase, the management estimated that the computers would last approximately 5 years and would have a salvage value at that time of P500,000. The company used the double-declining balance method of depreciation. During 2005, the management realized that technological advancements had made the computers virtually obsolete and that they would have to be replaced. Management now believes that the useful life of the computers should have been 3 years from the date of acquisition and decided to depreciate the computers using the new estimate.
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 2, 2004, Salonga Company purchased a large quantity of personal computers.
The cost of these computers was P5,000,000. On the date of purchase, the management
estimated that the computers would last approximately 5 years and would have a salvage
value at that time of P500,000. The company used the double-declining balance method of
depreciation. During 2005, the management realized that technological advancements had
made the computers virtually obsolete and that they would have to be replaced.
Management now believes that the useful life of the computers should have been 3 years
from the date of acquisition and decided to
estimate.
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