Depreciation of Lewis Driscoll and Delta Cargo
The depreciation of crane has been calculated using the Straight Line method (SLM), Double Declining Balance (DDB). The impact of the depreciation expense on the earnings of the company has been shown. The depreciation as per tax-based modified accelerated cost-recovery system (MACRS) has also been computed. The impact of depreciation expense under the two methods- SLM and DDB- on the amount of bonus has been shown. It has been shown how a higher depreciation expense reduces the amount of managerial bonus whereas a lower depreciation expense increases the amount of managerial bonus. It has also been shown how the amount of depreciation charged impacts the tax outflow of the company. In fact, the earnings are also affected by the choice of asset disposal. If the company disposes of the asset at a loss the resulting impact on earnings and bonus has also been shown. Delta Cargo is planning to acquire a new crane which will improve the overall efficiency of the company’s operations. However, there is some amount of uncertainty with the appropriate depreciation method to be used for the new asset. Ideally, the amount of depreciation should be such that it helps the company in saving taxes. Although depreciation does not involve any cash outflow the amount of depreciation affects the profitability of the company thereby impacting managerial remuneration. In order to estimate the amount of depreciation one has to estimate the depreciable cost of the asset. When equipment is purchased the company has to incur various costs to put it into working conditions. While some of the costs are of capital nature the others are of a revenue nature. The capital expenses are added to the acquisition cost of the equipment to ascertain the depreciable cost of the asset and the revenue costs are shown as an expense in the profit and loss statement. The capital expenses incurred are mostly of the higher amount.