Premium Essay

Depreciation Case

In: Business and Management

Submitted By mgmtcoop
Words 469
Pages 2
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...

Similar Documents

Premium Essay

Accounting Case Assignment Depreciation on House

...Burke Ellzey Case 2 The primary problem faced by this staff auditor is whether King Realty properly calculated the depreciation on the houses. The controller did not calculate depreciation for the first five years of the useful life of the rental houses. Also, the controller did not calculate depreciation when nobody was living in the house. The alternative would have been to calculate depreciation over the entire useful life not excluding the first five years, and including the time when nobody is living in the houses. The controller argues that since the purpose of depreciation is to measure the “using up” of an asset, no depreciation should be recorded because the usefulness of the asset actually increase during the first five years. Also, the controller argues that since no revenue is being generated when the house is vacant, no depreciation expense should be recognized. Accounting Standards Codification (ASC) No. 360-10-35-4 states that “the cost of a productive facility is one of the costs of the services it renders during its useful economic life. Generally accepted accounting principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility....

Words: 421 - Pages: 2

Premium Essay

Financial Management

...Disclosure of accounting policies for depreciation followed by * Accounting Standard (AS) 6, Depreciation Accounting, was issued by the Institute in November 1982. 1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards are intended to apply only to items which are material. 100 AS 6 (revised 1994) an enterprise is necessary to appreciate the view presented in the financial...

Words: 2422 - Pages: 10

Premium Essay

Stern Corporation

...Case 7 1: Stern Corporation (B)* Note: This case is updated from the Twelfth Edition. Approach This is a straightforward problem, designed for use in connection with study of the text. I find it useful to put T-accounts on the board or on a Vugraph and post entries to them as they are given. The account titles given in the balance sheet should be used. The case assumes individual unit depreciation. It may be desirable to ask at some point what the entries would be if composite or group depreciation were used. Comments on Questions Question 1 1. Cash 3,866 Accumulated Depreciation, Factory Machinery 27,367 Factory Machinery 31,233 2. Tools Used (Expense) 7,850 Tools 7,850 (Note the contrast between depreciation and a direct write-off.) 3. (a) Depreciation Expense 278 Accumulated Depreciation, Automotive Equipment 278 (The additional depreciation is 1/6 x .20 x $8,354. Note that the half-year convention is not used. Note that if the depreciation incurred in 2006 is disregarded, the loss will be overstated.) (b) Cash 2,336 Accumulated Depreciation, Automotive Equipment 5,458 Loss on Sale of Other Assets 560 Automotive Equipment 8,354 (There can be a discussion of the proper showing of the loss on the income statement.) 4. Patent Amortization Expense 11,250 Patent 11,250 5....

Words: 442 - Pages: 2

Premium Essay

Intermediate Accounting Chapter 11

...Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Questions for Review of Key Topics Question 11-1 The terms depreciation, depletion, and amortization all refer to the process of allocating the cost of property, plant, and equipment and finite-life intangible assets to periods of use. The only difference between the terms is that they refer to different types of these long-lived assets; depreciation for plant and equipment, depletion for natural resources, and amortization for intangibles. Question 11-2 The term depreciation often is confused with a decline in value or worth of an asset. Depreciation is not measured as decline in value from one period to the next. Instead, it involves the distribution of the cost of an asset, less any anticipated residual value, over the asset's estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset. Question 11-3 The process of cost allocation for plant and equipment and finite-life intangible assets requires that three factors be established at the time the asset is put into use. These factors are: 1. Service (useful) life — The estimated use that the company expects to receive from the asset. 2. Allocation base — The value of the usefulness that is expected to be consumed. 3. Allocation method — The pattern in which the usefulness is expected to be consumed....

Words: 16063 - Pages: 65

Premium Essay

Valuation of Fixed Assets

...The difference in depreciation due to revaluation is...

Words: 678 - Pages: 3

Premium Essay

How to Make a Good Target

...Income tax Act allows depreciation as allowable expenditure under the head Profits & Gains of business and profession for the assets owned and used by the assessee for the purpose of business on a Block of Assets concept at the rates prescribed in the Act. In case the asset is put to use for less than 180 days in the year of acquisition, the depreciation allowed for such assets is restricted to 50 % of the amount calculated at the % prescribed under the IT act. owned and used by the assessee for the purpose of business on a Block of Assets concept at the rates prescribed in the Act. In case the asset is put to use for less than 180 days in the year of acquisition, the depreciation allowed for such assets is restricted to 50 % of the amount calculated at the % prescribed under the IT act. owned and used by the assessee for the purpose of business on a Block of Assets concept at the rates prescribed in the Act. In case the asset is put to use for less than 180 days in the year of acquisition, the depreciation allowed for such assets is restricted to 50 % of the amount calculated at the % prescribed under the IT act. owned and used by the assessee for the purpose of business on a Block of Assets concept at the rates prescribed in the Act. In case the asset is put to use for less than 180 days in the year of acquisition, the depreciation allowed for such assets is restricted to 50 % of the amount calculated at the % prescribed under the IT act....

Words: 399 - Pages: 2

Premium Essay


...For example, if a company switched from straight-line depreciation to double-declining-balance depreciation in 2015, depreciation expense for 2015 could not be compared with prior years’ depreciation expense without knowing the effects of the change in accounting for depreciation. Consistency means that a company applies the same methods to similar transactions and events from period to period. Therefore, accounting changes, especially changes in methods used, would detract from the informational characteristic of consistency. 2. a. Change in accounting estimate. As a result of experience or the availability of new information, a company may revise estimates used in the measurement of income. b. Change in accounting principle. A change in accounting principle or meth-od may be required due to changing economic conditions or as a result of a new pronouncement issued by an authoritative standard-setting body. 3. Alternative procedures suggested for reporting accounting changes are as follows: a. Restate the financial statements presented for prior periods to reflect the effect of the change. Adjust the beginning Retained Earnings balance of the earliest period reported for the cumulative effect of the change in all preceding years. b. Make no adjustment to statements presented for prior periods. Report the cumulative effect of the change in the current year as a direct entry to Retained Earnings. c. Same as (b) except report the cumulative...

Words: 10780 - Pages: 44

Premium Essay

Business Finance Exercises

...The company will use the prime cost depreciation method for tax purposes and management expects it will be able to sell the machine at the end of its effective life for about $20,000. It is estimated that the additional machine will increase annual revenues by $200,000 and operating expenses will be around 80% of revenues. The expansion will require an additional initial investment of $5,000 in its stock of raw materials, which will be recovered at the end of the project. The company's tax rate is 30% and the required return is 12%. Prepare a schedule of the relevant cash flows generated by the new machine, calculate the NPV, and advise management as to whether they should invest the new machine. Depreciation: For an effective life of 10 years, the prime cost depreciation rate is 10%. Therefore: 150000 x 10% = $15000 depreciation expense per year....

Words: 1145 - Pages: 5

Premium Essay


...The cash break-even is achieved first since it excludes depreciation. The accounting break-even is next since it includes depreciation. Finally, the financial break-even, which includes the time value of money, is achieved. 6. Traditional NPV analysis is often too conservative because it ignores profitable options such as the ability to expand the project if it is profitable, or abandon the project if it is unprofitable. The option to alter a project when it has already been accepted has a value, which increases the NPV of the project. 7. The type of option most likely to affect the decision is the option to expand. If the country just liberalized...

Words: 8422 - Pages: 34

Premium Essay


...Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact as long as the land is owned. In fact, in many cases, the usefulness of land increases over time because of the scarcity of good sites. Thus, land is not a depreciable asset. During a depreciable asset's useful life its revenue-producing...

Words: 4465 - Pages: 18

Premium Essay

Real Options

...In this case, the initial NPV, IRR, and MIRR, all evaluated at the 12% average cost of capital and using the expected input values, indicate that the firm should accept the project. However, the risk analysis as done in the scenario analysis indicates that the project is riskier than average, hence the evaluation should be done with a somewhat higher WACC. Note that firms have two types of assets—-assets-in-place (past investments) and growth opportunities. The FCF projections reflect the results of assets now in place and also its expected future investments from growth opportunities. 13-2 Externalities relate to effects that a given project might have on the firm’s other assets. More broadly, externalities relate to effects within...

Words: 12421 - Pages: 50

Premium Essay

Chapter 11 Intermediate Accounting

...CHAPTER 11 Depreciation, Impairments, and Depletion ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) | | |Brief Exercises | | | Concepts for | |Topics |Questions | |Exercises |Problems |Analysis | |1. |Depreciation methods; meaning of |1, 2, 3, 4, 5, 6, | |1, 2, 3, 4, 5, 8, |1, 2, 3 |1, 2, 3, 4, 5 | | |depreciation; choice of depreciation |10, 14, | |14, 15 | | | | |methods. |20, 21, 22 | | | | | |2. |Computation of |7, 8, 9, 13 |1, 2, 3, 4 |1, 2, 3, 4, |1, 2, 3, |1, 2, 3 | | |depreciation. | | |5, 6, 7, |4, 8, 10, 11, 12 | | | | | | |10, 15 | | | |3. |Depreciation base....

Words: 21765 - Pages: 88

Premium Essay


...Depreciation is defined as a non-cash expense that reduces the value of an asset as a result of physical or functional factors over time. Therefore, the costs of the fixed assets should be recorded as an expense over their useful lives, since they depreciate and must be replaced once the end of their useful life is reached. Physical depreciation factors include wear and tear during use or from being exposed to such things as weather. Functional depreciation factors include obsolescence or changes in customer needs that cause the asset to no longer provide services for which it was intended or needed. When it comes to computing depreciation, there are three factors that determine the depreciation expense for a fixed asset: the asset’s initial cost, expected useful life, and estimated residual value. And there are also three different ways to calculate depreciation: the straight –line method, the units-of-production method, and the double-declining-balance method. The straight-line method of depreciation provides the same amount of depreciation expense for each year of the asset’s useful life, and is known to be the most commonly used method of calculating depreciation. The unit’s-of-production method of depreciation provides the same amount of depreciation expense for each unit of production....

Words: 659 - Pages: 3

Premium Essay

Assignment Form

...| |Sum of Years’ Digits Method | | |Accelerated Book Depreciation: |The Double-Declining Balance (DDB) accelerated depreciation method computes depreciation by multiplying the asset’s net book value at the beginning of each year by a | |Double Declining Balance Method |constant percentage, or factor. In the case of DDB, the...

Words: 362 - Pages: 2

Premium Essay

Delta Airlines

...TUNKU PUTERI INTAN SAFINAZ SCHOOL OF ACCOUNTANCY COLLEGE OF BUSINESS BKAL 3063 INTEGRATED CASE STUDY SECOND SEMESTER FEBRUARY 2015/2016 (A152) GROUP: B (5) WRITTEN REPORT CASE ANALYSIS CASE : Depreciation at Delta Air Lines: The “Fresh Start” PREPARED FOR: PROF. DR. MOHAMAD ALI B ABDUL HAMID PREPARED BY: NAME | MATRIC NO | AHMAD SHABIRIN BIN BAHRIN | 221521 | YELMI MARIANI BINTI ZULKIFLI | 221792 | LEONG SIAO ZHUEN | 230190 | NIWASHINI A/P SUBRAMANIAM | 230293 | ANG HUI QIN | 230294 | EXECUTIVE SUMMARY Delta Airline began 2008 with more worldwide destination of 321 destinations in 58 countries. In 2008 merged with Northwest Airlines, become the largest airline in the world. In May 1st 2007, Delta adopted policies regarding estimated lives & residual values for aircraft, but its was far from the 1st time it had changed its estimates. PPE (flight, ground property) are often more than half of the total asset. Depreciation of those asset is a major operating expenses and is not an attempt to measure the current value of assets. The amount of depreciation estimated by an airline company for each operating period is based in the cost of asset, estimates of asset lives, and assumptions about residual values at the end of the asset lives. These estimates & assumptions have changed through the years for almost all airlines. Depreciation practices had been change several time....

Words: 944 - Pages: 4