es 912 a definition
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8/9/2019 Es 912 a Definition
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SET A
1.DEPRECIATION
-is the decrease in the value of phsical propert !ith the passa"e of
ti#e.
a$ Purpose of Depreciation1. To provide for the recover of capital !hich has %een invested in
phsical propert.
&. To ena%le the cost of depreciation to %e char"ed to the cost of
producin" products or services that result fro# the use of the propert.
%$ Tpes of Depreciation
1. Nor#al Depreciation
a. phsical ' is due to the lessenin" of the phsical a%ilit of a propert
to produce results. It(s co##on causes are !ear and deterioration.
%. functional ' is due to the lessenin" in the de#and for the function
!hich the propert !as desi"ned to render. It(s co##on causes are
inade)uac* chan"es in stles* population center shift* saturation of #ar+ets*
or #ore e,cient #achines are produced.
&. Depreciation due to chan"es in price levels ' is al#ost i#possi%le to
predict and therefore is not considered in econo# studies
. Depletion ' refers to the decrease in the value of a propert due to
the "radual etraction of its contents.
c$ Re)uire#ents of a depreciation #ethod
1. It should %e si#ple.
&. It should recover capital. The %oo+ value !ill %e reasona%l close to the #ar+et value at an
ti#e
/. The #ethod should %e accepted % the 0ureau of Internal Revenue.
d$ The Strai"ht line #ethod
-This #ethod assu#es that the loss in value is directl proportional to
the a"e of the propert.
d 2Co ' Cl$34
Dn n2Co-Cl$34
Cn Co-Dn
e. Sin+in" fund
-This #ethod assu#es that a sin+in" fund is esta%lished in !hich funds
!ill accu#ulate for replace#ent. The total depreciation that has ta+en place
up to an "iven ti#e is assu#ed to %e e)ual to the accu#ulated a#ount in
the sin+in" fund at that ti#e.
d 2Co ' Cl$3253A* i6*4$
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8/9/2019 Es 912 a Definition
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Dn d253A* i6* n$
Cn Co-Dn
f. Declinin" %alance
In this #ethod* so#eti#es called the constant percenta"e #ethod or
the 7atheson 5or#ula* it is assu#ed that the annual cost of depreciation is a
8ed percenta"e of the salva"e value at the %e"innin" of the ear. The ratio
of the depreciation in an ear to the %oo+ value at the %e"innin" of that
ear is constant throu"hout the life of the propert and is desi"nated % +
the rate of depreciation. This #ethod does not appl* if the salva"e value is
9ero* %ecause + !ill %e e)ual to one and d1 !ill %e e)ual to Co.
dndepreciation durin" the nth ear
dn2Co21-+$:n-1$+
Cn Co21-+$:n Co 2Cl3Co$:n34Cl Co21-+$:4
+ 1-2Cn3Co$:13n 1-2Cl3Co$:4
&. CAPITA4
a$ E)uit Capital or o!nership funds are those supplied and used % the
o!ners of an enterprise in the epectation that a pro8t !ill %e earned.
%$ 0orro!ed funds or capital are those supplied % others on !hich a 8ed
rate of interest #ust %e paid and the de%t #ust %e repaid at a speci8ed ti#e.
c. 0ond 5inancin"
A %ond is a certi8cate of inde%tedness of a corporation usuall for a
period not less than ten ears and "uaranteed % a #ort"a"e on a certain
assets of the corporation or its su%sidiaries. 0onds are issued !hen there is
need for #ore capital such as for epansion of the plant or the services
rendered % the corporation.
The face or par value of a %ond is the a#ount stated on the %ond.
;hen the face value has %een repaid* the %ond is said to have %een retired
or redee#ed. The %ond rate is the interest rate )uoted on the %ond.
d. The Corporation ' is a distinct le"al entit* separate fro# the individuals
!ho o!n it* and !hich can en"a"e in al#ost an tpe of %usiness transactionin !hich a real person could occup hi#self or herself.
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