Running head: CASE 9-3
Advanced Financial Accounting Theory ACCT-632
Module 5: Case 9-3
Liberty University
February 12, 2015
CASE 9-3 2
The depreciation base is the value of the asset that should be distributed over the expected
useful life, the concept of depreciation is important in financial accounting because it facilitates in
upholding its basic assumptions of accruals and fair presentation from the conceptual framework
(Tysiac, 2014).
Depreciation is listed as an expense and will state the amount that needs to be depreciated,
which is contained within the P&L. Depreciation continues over the life of the asset or until the
principle amount / original value is recovered through use of the asset (Tysiac, 2014). Conventional
accounting aims at expensing the asset over its useful life, thus dispersing the expense over various
accounting periods (Schroeder, et al., 2014). The spreading of the depreciation expense helps to
create consistency in the income statement, provided that the depreciation method selected allows
for a consistent treatment of the expense.
Depreciation is described as a process of systematic and rational cost allocation. The
depreciation process involves having a depreciation base, useful service life, and depreciation
methods. Depreciation accounting is a system of accounting that assigns the distributed cost value to
the lesser salvage value, other basic value of tangible capital assets; over the estimated useful life of
an asset. Depreciation is a process of allocation and not valuation (Schroeder, Clark & Cathey, 2014).
Bi. The value of the asset.
Bii. The charge(s) to expense.
Biii. The discretion of management in selecting the method
A. Explain the conventional accounting concept of depreciation
accounting.
CASE 9-3 3
The following advantages and disadvantages for the various depreciation methods used for
computer systems are a hybrid from Schroeder, et al., (2014) and Tysiac (2014):
Straight line – Advantages: Easy to calculate. Useful where the pattern of economic benefits
are hard to determine with precision. Suitable for depreciating assets that provide similar level of
economic benefits throughout their useful life.
Straight line – Disadvantage: May not reflect the true pattern of asset's economic benefits. If
the computer system is heavily used in the first year, then it should be depreciated more.
The first factor that should be considered is to assess how the computer system will be used
(Schroeder, et al., 2014). In the event that a computer store has multiple computer systems as
inventory, the expense for the computer system would appear as an expense when the computer
system is sold. For non-wholesale businesses, the computer system would be considered an asset.
Assets are generally depreciated over the useful life, depreciation would be assigned as an expense
for financial reporting purposes. Another consideration would be to determine the frequency of use
and to see if that would have any impact on the method of depreciation to apply.
business. Some managers prefer the accelerated method since, as an asset ages, the smaller
depreciation charges are offset by higher maintenance charges, which give balance sheet valuations
that are closer to the actual value of the asset.
D. What depreciation methods might be used for the computer
system? Describe the advantages and disadvantages of each.
C. Explain the factors that should be considered when applying the
conventional concept of depreciation to the determination of how
the value of a newly acquired computer system should be assigned
to expense for financial reporting purposes (ignore income tax
considerations).
CASE 9-3 4
Reducing balance-Advantages: Appropriate where the usefulness of an asset declines over its
useful life (e.g. IT equipment).
Reducing balance-Disadvantage: The rate of depreciation selected is subject to management
opinion and may be biased.
Sum of the year’s digits – Advantages: Easier to understand. The effect of decrease in
depreciation expense compared to reducing balance method.
Sum of the year’s digits – Disadvantages: More difficult to calculate.
There are two Bible references that link with this module’s topic of depreciation.
Lamentations 4:1:”How the gold has grown dim, how the pure gold is changed! The holy
stones lie scattered at the head of every street.” This passage explains how gold has lost its value
and it’s color and in essence is not worth the value that it originally was. This mirrors how convention
depreciation works.
Phillippians 3:8:” What is more, I consider everything a loss because of the surpassing worth of
knowing Christ Jesus my Lord, for whose sake I have lost all things. I consider them garbage, that I
may gain Christ.” In this verse, through knowing Jesus, all other tangible items and possessions of
previous importance and significance have been fully depreciated and do not contain value. In
accounting, this is done through either a significant event or through continued use of the asset until
the anticipated useful life is complete.
1.Bible Application
CASE 9-3 5
2. Reference
Schroeder, R. G. Clark, M. W. Cathey, J. M. (2014). Financial accounting theory and analysis: Text
and cases (11th ed.). Hoboken, NJ. John Wiley & Sons.
Tysiac, K. (2014, May). IASB clarifies appropriate methods of depreciation, amortization. Journal of
Accountancy. Retrieved from http://journalofaccountancy.com/news/2014/may/201410124.html
