Methods of Depreciation : Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear, or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life. The three methods of depreciation are: Straight-line method: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. Units-of-activity method: In this method of depreciation, the amount of depreciation is charged based on the unit of production each year. Double-declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years. To Respond – Mr. N and Ms. S regarding the maintenance of two set of books, one for tax purposes and another for financial statement purposes.

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At a recent luncheon, you were seated next to Mr. Fogle, the president of a local company that manufactures food processors. He heard that you were in a financial accounting class and asked:“Why is it that I’m forced to record depreciation expense on my property when I could sell it for more than I originally paid? I thought that the purpose of the balance sheet is to reflect the value of my business and that the purpose of the income statement is to report the net change in value or wealth of a company. It just doesn’t make sense to penalize my profits when the building hasn’t lost any value.”At the conclusion of the luncheon, you promised to send him a short explanation of the rationale for current depreciation practices.Required:Prepare a memo to Mr. Fogle. Explain the accounting concept of depreciation and contrast this with the dictionary definition of depreciation.

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Chapter 10, Problem 10.6CP

To determine

Methods of Depreciation: Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear, or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

The three methods of depreciation are:

Straight-line method: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.

Units-of-activity method: In this method of depreciation, the amount of depreciation is charged based on the unit of production each year.

Double-declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

To Respond – Mr. N and Ms. S regarding the maintenance of two set of books, one for tax purposes and another for financial statement purposes.

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At a recent luncheon, you were seated next to Mr. Fogle, the president of a local company that manufactures food processors. He heard that you were in a financial accounting class and asked:“Why is it that I’m forced to record depreciation expense on my property when I could sell it for more than I originally paid? I thought that the purpose of the balance sheet is to reflect the value of my business and that the purpose of the income statement is to report the net change in value or wealth of a company. It just doesn’t make sense to penalize my profits when the building hasn’t lost any value.”At the conclusion of the luncheon, you promised to send him a short explanation of the rationale for current depreciation practices.Required:Prepare a memo to Mr. Fogle. Explain the accounting concept of depreciation and contrast this with the dictionary definition of depreciation.

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