ACC 281 Week 2 DQ1 - 7416

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What are the differences among valuation, depreciation, amortization, and depletion? Is it appropriate to calculate depreciation using two different methods? Explain why. Which depreciation method provides you with the highest depreciation expense in the first year? Explain why. When might a company want the highest depreciation expenses possible? When might a company want the lowest depreciation expenses possible?

What are the differences among valuation, depreciation, amortization, and depletion?

Based on accrual accounting depreciation, amortization and depletion all require the cost of an asset to be expensed within the time frame of use or in simpler terms considered the matching principle.  These three methods mentioned above consist of prorating the costs of a specific asset to it’ specific life. For instance, amortization refers to intangible assets such as patents and expenses the costs associated with the asset over its useful life. Depreciation refers to expensing the costs of a tangible asset over its useful (or predicted) life. Depletion expenses costs based on the predicted life of the asset in question. Valuation is a measurement prediction in order to value a certain asset and determine its life and useful to the organization.  This measurement is actually just a form of predicting future outcomes, while the other three methods rely on expensing costs associated with the assets use.

Is it appropriate to calculate depreciation using two different methods? Explain why.

It is appropriate to calculate depreciation using two methods in order to ascertain what method best suites the needs of the organization and the usefulness of the asset in question.

Which depreciation method provides you with the highest depreciation expense in the first year? Explain why.

The declining balance method provides the highest depreciation expense in the first year due to the nature of the method.  This periodic (yearly) depreciation is based on the declining book value of the asset at the time, which is cost less accumulated depreciation.  The book value during the first year of the asset is the cost of the asset and due to the fact that depreciation is zero, its useful life.

When might a company want the highest depreciation expenses possible?

In order to minimize the organizations tax burden.

When might a company want the lowest depreciation expenses possible?

In order to maximize the organizations net income.

Solution Description

What are the differences among valuation, depreciation, amortization, and depletion? Is it appropriate to calculate depreciation using two different methods? Explain why. Which depreciation method provides you with the highest depreciation expense in the first year? Explain why. When might a company want the highest depreciation expenses possible? When might a company want the lowest depreciation expenses possible?