Reference no: EM132523339
Zumo Wang came to Northern Ireland from China six years ago to study at university for a degree in Computing and Electronics. After graduating he worked as an information technology manager for a computer company and saved his wages to build up the capital needed to invest in his own business. Zumo's friend Charles Wu, had recently put his computing consultancy business up for sale - 'PC:IT'. PC:IT was set up ten years ago, and seemed quite successful. The premises were located on a busy street in the town centre of Enniskillen, and operated a 'collect and return' service, enabling computers to be serviced without the customer having to leave their home. Upon purchase of the business from Charles, Zumo acquired a number of fixed assets for use in the business. These included a personal computer, a laptop computer and various machines facilitating welding and electronic engineering to be carried out on computer circuit boards, rebuilding computers and other assembly activities. The main fixed assets included: 1 personal computer valued at £8000; 1 laptop computer valued at £5000; welding machine valued at £2000 and engineering/assembly machinery valued at £10000. The two computers have a useful economic life of 4 years each, over which they would be depreciated. The remaining fixed assets have a useful economic life of 5 years each. The deprecation is calculated using the straight line method in all cases. Zumo is convinced that the purchase of PC:IT will be a worthwhile investment, although he does not see the need to depreciate the fixed assets, due to the specialised nature of the business.
Question 1: Explain what is meant by 'depreciation'.
Question 2: Calculate for each type of asset, the annual depreciation charges which would be charged to the profit and loss account.
Question 3: Calculate for each type of asset, the cumulative depreciation charges which would apply in the final year of the asset's useful economic life, which would be shown in the balance sheet.
Question 4: Outline to Zumo, the reasons why it is necessary to record charges for depreciation on an annual basis (within the financial statements) in respect of the various fixed assets which he has purchased for use in 'PC:IT'.
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