Question

1. Explain the concept of capitalization or capitalized? Include what type of costs might be included ? 2. Explain the concept of depreciation? 3. Describe the 3 months of depreciation and provide 3 examples of industries that might use each method? 4. Charles Inc. manufactures beauty supply equipment A review of its books for October revealed the following cost of equipment 500,000 useful life +10 years residual at the end of service life 75,000. Total hours to be run on equipment 125,000 Year 1 + 7,000 hours year 2= 10,000 hours Given the above what is accumulated depreciation at the end of year 2 for each method. a. What is the difference between a long and short term asset. 1 b. What is the difference between a tangible and intangible asset? 1

It is confusing to read, but can someone help me with answering these?

Answer 1

1. Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset, rather than being expensed in the period the cost was originally incurred.
2. Examples of capitalized costs include:

• Materials used to construct an asset
• Sales taxes related to assets purchased for use in a fixed asset
• Purchased assets
• Interest incurred on the financing needed to construct an asset
• Wage and benefit costs incurred to construct an asset
• Demolition of a site to prepare it for new construction
• Transport costs incurred to bring a purchased asset to its intended location
• Testing costs incurred to ensure that an asset is ready for its intended use

3. Different methods of Depreciation

Straight-line: This method spreads the cost of the fixed asset evenly over its useful life.

Industry: Automobiles-General Motors depreciates depreciable property using the straight-line method.

Declining-balance: An accelerated method of depreciation, it results in higher depreciation expense in the earlier years of ownership.

Units-of-production: The total estimated number of units the fixed asset will produce over its expected useful life, as compared to the number of units produced in the current accounting period, is used to calculate depreciation expense.

Industry: Mines and Quarries might use this method.

4. Straight-line method
Particulars			Amount
Cost of equipment			500,000.00
Residual value			75,000.00
Total useful life			10.00
Depreciation amount	SLM =(Cost − Salvage Value)/ Useful Life of the Asset	(500000-75000)/10	42,500.00
Machine Hour Rate Method
Cost of equipment			500,000.00
Residual value			75,000.00
Life of asset in hours			125,000.00
Depreciation per hour	(Cost- Resiual value)/ Life of asset in hours	(500000-75000)/125000	3.40
Depreciation - First year		7000*3.4	23,800.00
Depreciation - Second year		10000*3.4	34,000.00