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Accounting 201

Writing assignment 2

Depreciation

You work for a company that has been in business a long time. Their primary line of business is producing electronic circuit boards. The company has been reasonably profitable and has been successful servicing its long term debt. However, in recent years, their net income has been declining. They are considering buying a substantial piece of equipment which would help them be more efficient in their production activities. The equipment will cost about $500,000 including shipping costs. In addition, they will have to build a special platform and wiring for the machine at an estimated cost of $10,000. They will be required to put in special wiring to provide power to the machine and enclose it in a dust free environment by installing movable partitions at a cost of approximately $20,000. It will have an expected life of 10 years, and an expected salvage value of $5,000 at the end of 10 years. The company has purchased a maintenance contract from the machines builder for the life of the machine at the cost of $ 2,000 per year.

The chief financial officer of the company has come to you requesting advice as to how best to account for the items above. She has requested you write a memo to her, which she will review with the president of the company regarding accounting for the equipment. Specifically, she has requested that you discuss and analyze the amount that has to be capitalized vs whether any of it can be expensed, methods of depreciation available with an analysis of the impact that each method will have on the financial statements as a whole and your recommendation as to which method is best. Finally they want to know whether the method of treatment for financial statement purposes is the method they have to follow for tax purposes.

The Memo should have the following Heading:

MEMO From:

To:

Date:

Re:

The Body should be single spaced with a double space between paragraphs. Use headings as necessary. Develop each topic by discussing the applicable accounting rules then apply the facts in the problem to arrive at a conclusion.

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