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Depreciation Case

In: Business and Management

Submitted By mgmtcoop
Words 469
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As per the idea presented by few people at CFS, the company can charge the rental operation with depreciation expense. Generally, real property never depreciates in value, but since the investment in the property generates income via appreciation of value, it is acceptable to recover the costs against the income earned, through annual depreciation deductions. In our case, the sole purpose of the company’s real estate fund, which consists of houses, hotels and commercial buildings, is to provide income in the form of rental cash flow and share of appreciation in value of those properties.
Since the property is used for an income producing activity, the company can charge rental operation with depreciation expense. Despite the fact that the general rule is that the property will increase in value, or "appreciate" over time, charging depreciation does not indicate that the value of property have depreciated. Depreciation is merely an accounting expense to allocate the cost of the property over different periods (the asset’s useful life). Charging depreciation can also provide tax shelter for the company, since the depreciation cost can be treated as a considerable amount of tax deduction. Furthermore, such treatment provides an income statement more comparable to other real estate entities, as the rental operation costs are normally depreciated by most companies. This provides better comparability, however, at the cost of relevancy.

Alternative 2: Do not charge rental operation with depreciation expense
The other alternative for CFS is not to charge rental operation with depreciation expense, mainly because such information is not relevant to potential investors, for whom appreciation is of prime concern than depreciation. Traditionally, the purpose of depreciation is to allocate the asset’s cost over its useful life, in order to account for the continuous…...

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