SET A

1.DEPRECIATION
-is the decrease in the value of physical property with the passage of
time.
a) Purpose of Depreciation
1. To provide for the recovery of capital which has been invested in
physical property.
2. To enable the cost of depreciation to be charged to the cost of
producing products or services that result from the use of the property.
b) Types of Depreciation
1. Normal Depreciation
a. physical is due to the lessening of the physical ability of a property
to produce results. Its common causes are wear and deterioration.
b. functional is due to the lessening in the demand for the function
which the property was designed to render. Its common causes are
inadequacy, changes in styles, population center shift, saturation of markets,
or more efficient machines are produced.
2. Depreciation due to changes in price levels is almost impossible to
predict and therefore is not considered in economy studies
3. Depletion refers to the decrease in the value of a property due to
the gradual extraction of its contents.
c) Requirements of a depreciation method
1. It should be simple.
2. It should recover capital
3. The book value will be reasonably close to the market value at any
time
4. The method should be accepted by the Bureau of Internal Revenue.
d) The Straight line method
-This method assumes that the loss in value is directly proportional to
the age of the property.
d = (Co Cl)/L
Dn = n(Co-Cl)/L
Cn = Co-Dn
e. Sinking fund
-This method assumes that a sinking fund is established in which funds
will accumulate for replacement. The total depreciation that has taken place
up to any given time is assumed to be equal to the accumulated amount in
the sinking fund at that time.
d = (Co Cl)/(F/A, i%,L)

Dn = d(F/A, i%, n)
Cn = Co-Dn

f. Declining balance
In this method, sometimes called the constant percentage method or
the Matheson Formula, it is assumed that the annual cost of depreciation is a
fixed percentage of the salvage value at the beginning of the year. The ratio
of the depreciation in any year to the book value at the beginning of that
year is constant throughout the life of the property and is designated by k
the rate of depreciation. This method does not apply, if the salvage value is
zero, because k will be equal to one and d1 will be equal to Co.
dn=depreciation during the nth year
dn=(Co(1-k)^n-1)k
Cn= Co(1-k)^n = Co (Cl/Co)^n/L
Cl = Co(1-k)^L
k = 1-(Cn/Co)^1/n = 1-(Cl/Co)^L
2. CAPITAL
a) Equity Capital or ownership funds are those supplied and used by the
owners of an enterprise in the expectation that a profit will be earned.
b) Borrowed funds or capital are those supplied by others on which a fixed
rate of interest must be paid and the debt must be repaid at a specified time.
c. Bond Financing
A bond is a certificate of indebtedness of a corporation usually for a
period not less than ten years and guaranteed by a mortgage on a certain
assets of the corporation or its subsidiaries. Bonds are issued when there is
need for more capital such as for expansion of the plant or the services
rendered by the corporation.
The face or par value of a bond is the amount stated on the bond.
When the face value has been repaid, the bond is said to have been retired
or redeemed. The bond rate is the interest rate quoted on the bond.
d. The Corporation is a distinct legal entity, separate from the individuals
who own it, and which can engage in almost any type of business transaction
in which a real person could occupy himself or herself.
Advantages:
1. It enjoys perpetual life without regard to any change in the person of
its owners, the stockholders.
2. The stockholders of the corporation are not liable for the debts of
the corporation.

3. It is relatively easier to obtain large amounts of money for

expansion, due to its perpetual life.
4. The ownership in the corporation is readily transferred.
5. Authority is easily delegated by the hiring of managers.
Disadvantages
1. The activities of a corporation is limited to those stated in its charter.
2. It is relatively complicated in formation and administration.
3. There is a greater degree of governmental control as compared to
other types of
business organizations.