A Company Bought a New Computer for $1500: A

In today’s digital age, computers have become an essential tool for businesses to operate efficiently. As technology advances, companies must keep up with the latest hardware and software to remain competitive. Recently, a company purchased a new computer for $1500. In this article, we will examine the implications of this purchase and its impact on the company’s finances.

The purchase of a new computer is a significant investment for any business. The cost of the computer is not just the initial purchase price but also includes ongoing maintenance and upgrades. When a company buys a new computer, it must decide how to account for the cost of the asset. The two most common methods of accounting for the cost of an asset are depreciation and expensing. Depreciation is the process of allocating the cost of an asset over its useful life, while expensing is deducting the entire cost of the asset in the year it was purchased.

Body

 Depreciation

Depreciation is a method of accounting that allocates the cost of an asset over its useful life. The useful life of a computer is typically five years. Therefore, if a company chooses to depreciate the cost of the computer, it would allocate $300 per year for five years. This method is known as straight-line depreciation [1].

Depreciation has tax implications for businesses. When a company sells an asset that has been depreciated, it may be subject to depreciation recapture. Depreciation recapture is the process of adding back the amount of depreciation that was previously deducted from the company’s taxable income [2].

 Expensing

Expensing is another method of accounting for the cost of an asset. When a company expenses an asset, it deducts the entire cost of the asset in the year it was purchased. This method is known as section 179 expensing. Section 179 expensing allows businesses to deduct up to $1,050,000 of the cost of qualifying assets in the year they were purchased [2].

Expensing has tax implications for businesses as well. When a company expenses an asset, it cannot depreciate the asset in future years. Therefore, if the company sells the asset, it cannot claim depreciation recapture.

 Financial Impact

The purchase of a new computer for $1500 will have a financial impact on the company. If the company chooses to depreciate the cost of the computer, it will allocate $300 per year for five years. This allocation will reduce the company’s taxable income by $300 per year for five years. Alternatively, if the company chooses to expense the cost of the computer, it will deduct the entire $1500 in the year it was purchased. This deduction will reduce the company’s taxable income by $1500 in the year it was purchased.

Disposal of Asset

When a company disposes of an asset, it must account for the disposal properly. In this case, assuming a five-year estimated service life and straight-line depreciation, the company would use depreciation expense, fixed assets, and sales income accounts to record the disposal of the asset [3].

When the company disposes of the computer, it must calculate the book value of the asset. The book value is the original cost of the asset minus any accumulated depreciation. In this case, after three years of use, the accumulated depreciation would be $900 ($300 per year for three years). Therefore, the book value of the computer would be $600 ($1500 – $900). If the company sold the computer for $300, it would realize a loss of $300 ($300 – $600).

Conclusion

In conclusion, the purchase of a new computer for $1500 has financial implications for the company. The company must decide how to account for the cost of the asset, either through depreciation or expensing. Additionally, when the company disposes of the asset, it must account for the disposal properly. Overall, the purchase of a new computer is a significant investment for any business, and careful consideration must be given to its accounting and tax implications.