Financial management
Querist : Anonymous
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..
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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
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