Ch 10 Depreciation, Impairments, and Depletion Flashcards
Because these methods allow for higher early-year expenses than in the straight-line method, they are often called _______________
ex: decreasing-charge methods
accelerated depreciation methods
Also called the variable-charge or units-of-production approach
Assumes that depreciation is a function of use or productivity, instead of the passage of time. In other words, more depreciation should be recognized the more the asset is used.
activity method
Cost allocation of intangible assets (such as patents and copyrights)
amortization
How efficiently a company uses its assets to generate sales is measured by
Calculated by net sales/ average total assets
asset turnover
In this method, the assets are larger in value and often contain numerous components
composite method
Normally, companies compute depletion aka _____________, on a units-of-production method. That means depletion is a function of the number of units extracted during the period.
cost depletion
A second decreasing-charge depreciation method
The _______________ determines depreciation expense by applying a constant percentage to the declining book value of the asset each year. This method does not deduct the salvage value in computing depreciation expense.
declining-balance method
______________ provide for a higher depreciation expense in the earlier years and lower expense in later years
decreasing-charge method
Cost allocation of natural resources (such as timber, gravel, oil, and coal)
depletion
Cost allocation of property, plant, and equipment. Remember that land is not ___________, but land improvements are ___________
depreciation
Divided into two parts:
1. tangible equipment costs and 2. intangible development costs
development costs
Companies use various multiples for the declining balance method in practice, although the __________ is quite common
A form of accelerated depreciation that doubles the regular depreciation approach
double-declining-balance method
As soon as a company has the right to use the property, it often incurs ________ to find the resource
exploration costs
Those who support the ____________ argue that the cost of drilling a dry hole is a cost needed to find the commercially profitable wells.
full-cost concept
Use when the assets are similar in nature and have approximately the same useful lives
Closely approximates a single-unit cost procedure because any deviation from the average amount in most cases is not that great
“mass basis”
group method
The write-off of all or part of the carrying value of property, plant, and equipment is referred to as ______________
impairment
If the company does not expect to purchase additional properties, it may gradually distribute to stockholders their capital investments by paying _____________, which are dividends greater than the balance in retained earnings.
liquidating dividends
In the Tax Reform Act of 1986 Congress enacted _________. It applies to depreciable assets placed in service in 1987 and later.
Modified Accelerated Cost Recovery System (MACRS)
Such as petroleum, minerals, and timber, are used in a company’s operations. These assets have two main features:
1. the complete removal (consumption) of the asset
2. Replacement of the asset only by an act of nature
natural resources
Another measure for analyzing the use of property, plant, and equipment
Calculated as net income/ net sales
profit margin on sales
A test used to determine whether an impairment has occurred
recoverability test
Companies sometimes incur substantial costs to restore property to its natural state after extraction has occurred
restoration costs
Calculated by net income/ average total assets
OR profit margin on sales x asset turnover
return on assets (ROA)
The estimated amount that a company will receive when it sells the asset or removes it from service. The ____________ is not depreciated because the company expects to receive that amount when the asset is later sold or scrapped. It is the amount to which a company writes down or depreciates the asset during its useful life.
salvage value (disposal value)
Considers depreciation as a function of time rather than a function of usage
straight-line method
When others believe that companies should capitalize only the costs of successful projects. Its proponents believe that the only relevant measure for a project is the cost directly related to that project, and that companies should report any remaining costs as period charges.
successful-efforts concept
The _______________ results in a decreasing depreciation expense based on a decreasing fraction of the depreciable base (original cost less salvage value).
sum-of-the-years’-digits method
