Explain basic factors affecting the amount of depreciation.
The amount of depreciation is determined by three main parameters. First, the Original Cost of the asset acts as the basis for calculation. This includes the invoice price and all necessary expenditures to put the asset in working condition, such as freight, installation, and registration costs.
Second, the Salvage Value affects the amount. This is the estimated net realizable value of the asset at the end of its useful life. The difference between the original cost and the salvage value is the total amount to be depreciated.
Third, the Useful Life of the asset is a key factor. This refers to the estimated period over which the asset is expected to be used by the business. A longer useful life typically results in a smaller annual depreciation charge.
Explanation
The question specifically asks for factors affecting the amount of depreciation (calculation parameters), not the causes of depreciation (like wear and tear or obsolescence). Based on the provided context, section 7.5 and point number 5 explicitly list these determinants. The student is expected to list and briefly explain Original Cost, Salvage Value, and Useful Life.
Solution Steps
Step 1: Identify the three specific parameters from the text that determine the depreciation amount (Cost, Salvage Value, Useful Life).
Step 2: Define 'Original Cost' using the text (invoice price plus freight, installation, etc.).
Step 3: Define 'Salvage Value' as the estimated value at the end of the useful life.
Step 4: Define 'Useful Life' as the estimated period of use.