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.
15. Two machines A and B are being considered for use in a small manufacturing plant. Machine A has a first cost of P125 000.00, an estimated life of seven years and a salvage value of P12 500.00. Annual operations and maintenance cost is estimated to be P10 000.00. The corresponding figures of machine B are P175 000.00, seven years, P25 000.00, and P8500.00. Using future worth analysis and an interest rate of 14%, specify which machine should be preferred. (Ans. Select Machine A, - P407.588.51)
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