Chapter 11: Depreciation, Impairments, and Depletion Flashcards
Depreciation
Allocating the cost of a tangible asset in a systematic and rational way to periods expected to benefit from the use of the asset.
What are the factors involved in depreciation process?
- Depreciable base
- Useful life
- Best method of cost allocation
Activity Method
Assumes that depreciation is due to how the asset is used. The useful life is an output or input measure.
(Cost less Salvage) x Hours This Year
divided by
Total Estimate Hours
Straight-line Method
Allocates cost based on passage of time.
Cost less Salvage
divided by
Estimated Service life
Decreasing-charge methods
Provide a higher depreciation cost in the earlier years and lower charges in later periods.
Sum-of-the-Years’-Digits
Allocation is based on a fraction of the depreciable base, which is based on the sum of each years digits.
Depreciation Fraction:
Remaining Life
divided by
The sum of the years’ digits
Declining-Balance Method
Allocation technique where a constant percentage is applied to the book value of an asset.
Declining-balance rate x Book value of asset at the BOP
Does not deduct salvage value.
Group Method
Allocation method used when a group of assets are similar in nature and have similar useful lives.
Composite Method
Allocation method used when the assets are dissimilar and have different lives.
How is group & composite method depreciation calculated?
- Compute annual depreciation on each asset
- Compute total cost of each asset
- Compute composite rate
Total annual deprecation on each asset
divided by
Total cost of each asset
- Multiply the rate by the total cost of each asset
How are depreciation rates revised?
- Accounted for in the current period and prospective periods
- No change to previously reported results
Impairment
A decrease in the value of a long term asset to an amount that is less than its original cost and cannot be recovered.
How do impairments happen?
- Decrease in market value of an asset
- Change in use of asset
- Adverse legal environment for an asset’s use
- Excess costs associated with use
- Forecasts of excess costs or losses associated with asset
Recoverability Test
A test to determine whether an impairment of a long-lived asset has occured.
If the sum of the expected future net cash flows from the asset is less than the book value of the asset, an impairment has ocurred.
What is the journal entry to record impairment?
Loss on impairment
Accumulated Depreciation
