Financial management

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..

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CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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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 :)

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CA Suraj Lakhotia

CA Suraj Lakhotia (Expert)
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12 July 2012 Welcome.

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