Business A purchases manufacturing equipment that cost S250,000. Economic life i

Question

Business A purchases manufacturing equipment that cost S250,000. Economic life is estimated as s years with a salvage Value of 15.000. This company chooses the accelerated cost recovery method for depreciation Business B. in competition with company A. buys the same equipment at identically cost. The managements of company B Uses straight-line depreciation Determine the yearly depreciation changes and the end-of-year book value for companies A and B. Discus the two methods under this competitive situation on the comment on the importance of the depreciation method for the cost estimating.

Explanation / Answer

The accelerated method provides for more depreciation during the early years as compared to Straight Line method which provides for equal charges during the life of the asset.

The rationale for accelerated methods is that the asset is more productive during its early years .

Business A Accelerated Depreciation : Suppose Business A uses Sum of the digits method Depreciation Base for all years would be 250,000 - 15,000 = 235,000 The depreciation would be calculated as ;

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