a. Is the acquisition of Arya Company constitute a business? Justify your answer in no more than five (5) sentences. b. Is the acquisition of Bron Company constitute a business? Justify your answer in no more than five (5) sentences.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 20X2, Sansa Company purchases two (2) separate sets of assets and activities from thirdparties, as follows:
i. A manufacturing plant of Arya Company. The set of assets acquired and liabilities assumed are as follows:
Plant premise P100,000,000
Machinery 60,000,000
Equipment 30,000,000
A mortgage loan secured on the plant premise 120,0000
Sansa will continue to employ the existing employees of the manufacturing plant and will pay them the
same salaries as before. The above manufacturing plant is a cash-generating unit that generates
outputs that are sold to outside customers. Sansa pays a cash consideration of P100 million to Arya
Company.
ii. A set of assets and liabilities of Bron Company.
Plant premise P100,000,000
Machinery 60,000,000
Equipment 30,000,000
A mortgage loan secured on the plant premise 120,0000
The vendor will retrench the existing employees of the factory and pay their termination benefits. The set
of assets is not capable of generating independent cash flows. However, Sansa Company believes it can
use this set of assets to obtain economies of scale with its existing facilities. It pays a consideration of
P55 million to the vendor.
Questions:
a. Is the acquisition of Arya Company constitute a business? Justify your answer in no more than five
(5) sentences.
b. Is the acquisition of Bron Company constitute a business? Justify your answer in no more than five
(5) sentences.
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