Case Scenario:
Andragon Manufacturing, a small private company, has recently hired you as their accounting department supervisor. You have been told that your role will also include some of the day-to-day accounting. John Edwards, the company's CEO and principal shareholder, has told you during your hiring interview that his strategy is to expand Andragon's operations and that he is seriously thinking about taking the company public in the near future. As such, he has instructed the company's human resources manager to hire several management trainees to expand Andragon's management force.
Problem:
Andragon Manufacturing has just purchased a new computer server. The unit cost $85,000 and has a useful life of six to seven years with no salvage value. Karen Smith, the company's bookkeeper, is asking you how this new asset is to be depreciated and what your perspective is on depreciation. Explain to Karen depreciation options and significance; the factors that ought to be considered when applying the concept of depreciation to the value of the new server; and in what way(s) depreciation affects a company's balance sheet, income statement, and its statement of cash flows. Next, make a recommendation for a specific method of depreciation and clearly explain the rationale behind your recommendations. Be sure to explain how your recommended depreciation methodology works, and explain its advantages and disadvantages in comparison to other depreciation methods.