The ABC Company has a policy to capitalize an asset with a threshold of $5,000 per item or a project/program. The ABC Company has an ongoing rolling replacement project/program to replace 20% of all computers annually. In addition, the ABC Company uses straight line method, with a useful life of five year for the computers, and a half year convention. In fiscal year 2017, the ongoing project costs was $100,000. What is the depreciation expense for the fiscal year 2017?
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To calculate the depreciation expense for the fiscal year 2017, we need to follow a few steps:
Step 1: Determine the number of computers replaced in fiscal year 2017.
The ABC Company has an ongoing rolling replacement project/program to replace 20% of all computers annually. Let's assume the initial number of computers is N. Therefore, the number of computers replaced in fiscal year 2017 will be 20% of N.
Step 2: Calculate the cost of each replaced computer.
The ongoing project costs $100,000 in fiscal year 2017. To determine the cost per replaced computer, we divide the total project cost by the number of computers replaced in fiscal year 2017.
Step 3: Calculate the capitalized cost of the replaced computers.
Since the ABC Company has a policy to capitalize an asset with a threshold of $5,000 per item or project/program, we need to determine whether the cost of each replaced computer exceeds $5,000. If it exceeds, it will be capitalized, otherwise, it will be expensed. Therefore, we multiply the number of capitalized computers by $5,000 to get the capitalized cost.
Step 4: Calculate the depreciation expense.
The ABC Company uses the straight-line method and assumes a useful life of five years for the computers, with a half-year convention. Therefore, the annual depreciation expense will be the capitalized cost divided by the useful life (in years). However, since the half-year convention is used, the depreciation expense for the fiscal year 2017 will be half of the annual depreciation expense.
By following these steps, you can determine the depreciation expense for fiscal year 2017 for the ABC Company.