Question

in computing depreciation, three values, must be known or estimated; identify and explain the nature of each.

Answer 1

Answer:

The answer is:

1. Acquisition cost.

2. Estimated useful life to the company.

3. Estimated residual value at the end of the asset’s useful life to the company.

Explanation:

1. Acquisition cost/Purchase price: This is the amount at which the asset(s) was bought. The acquisition cost will include the original purchase price, the cost of transporting the asset to the factory etc. and subtract any purchases discount.

2. Estimated Useful life to the company: This is the number of years the purchased asset are estimated to last for. E.g fitting and furniture with an estimated value of 5 years while the equipment for production can be 7 years. This depends on the company policy though.

3. Estimated residual value: This is the amount of money the firm is expected to get from the asset after it has been fully depreciated.