Capitalization and Depreciation
Response to the following problem:
Gehl Company purchased significant amounts of new equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Gehl, and placed into operation. Gehl purchased some for cash with discounts available for prompt payments. It purchased some under long-term payment plans, for which the interest charges approximate prevailing rates. As a result, Gehl is studying its capitalization and depreciation policies.
Required
1. What costs should Gehl capitalize for the new equipment purchased this year?
2. What factors cause the equipment to lose its future economic benefit?
3. What factors should be considered in computing the equipment's depreciation expense?
4. What theoretical justifications are there for the use of accelerated depreciation methods?