Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.) * Identify decisions that managers like Choi must make in applying depreciation methods. Mangers must look at an asset and use three factors to determine depreciation. These factors are cost, salvage value, and useful life. “The cost of a plant asset consists of all necessary and reasonable expenditures to acquire it and to prepare it for its intended use” (Wild et al., 2013). In other words, along with the basic cost of the asset itself one must consider what other purchases must go along with this asset to make it function, like wiring and labor to install. The salvage value is what the asset is worth as scrap. It is also called the residual value. If the asset can be traded in for a replacement, the residual value would be the trade-in value. Sometimes, a trade-in value is not known at the time of the purchase and will not be determined until the process to purchase a replacement has begun. The useful life of an asset is the duration of time that the asset will be used in the company’s operation.