The overall cost of the machine is P1,200,370. Molemi Group has P900,000 in the bank. The useful life of the machine is estimated to be 10 years and the policy is depreciated using diminishing balance at 10%. Let's say Molemi Group chooses to construct an office and shop with the money they have, which would cost the same as the machine above, and borrows the remainder from the bank at 7% interest over two years. The money is invested at 5% per year six months before construction starts. How would it be shown in the first year's financial statements?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
The overall cost of the machine is P1,200,370. Molemi Group has P900,000 in the bank. The useful life of the machine is estimated to be 10 years and the policy is depreciated using diminishing balance at 10%.
Let's say Molemi Group chooses to construct an office and shop with the money they have, which would cost the same as the machine above, and borrows the remainder from the bank at 7% interest over two years. The money is invested at 5% per year six months before construction starts. How would it be shown in the first year's financial statements?
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