Financial management

Save Share

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

09 July 2012 Please Explain this point

Cost of Depreciation :

Depreciation provision may be considered in a similar manner to retained earnings ..they have an opportunity cost and represent an increased stake in the firm by its shareholders.However, a distribution of depreciation provisions would produce a capital reduction, probably requiing outstanding debts to be repaid due to deplition of the capital base, the security against which the debt was obtained..

please get back to be ASAP

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)

09 July 2012 If I understand the para correctly -

1. Charging of depreciation reduces value of asset in books.
2. Fixed assets like plant and machinery are provided as security to banks/financial institutions for availing loans.
3. If the value of fixed asset is reduced, then the security value comes down as a result of which the eligible loan amount also comes down. Thus resulting in repayment of loan.

Assuming bank finances 70% of value of Plant. If the plant value in Year 1 is Rs.100, then loan of Rs. 70 can be taken. In Year 2, the value of plant becomes 85 (assuming 15%) depreciation. The loan that can be taken is only Rs. 59.5/- the balance is to be repaid.

Querist : Anonymous

Querist : Anonymous (Querist)

12 July 2012 Thanks for the explanation..u really explained it very well..Thanks a lot again :)

CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)

12 July 2012 Welcome.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now