Chapter 10 Test 1 Flashcards
Long Lived Tang. Asset
Estimating Service Life
Firms must review their estimates of service lives each year. Change in the estimate will change the depreciation and amortization amounts going forth.
Pattern of Depreciation and Amortization
3 basic patterns 1. straight line over time 2. straight line with respect to usuage 3. Acelerated over time.
Straight Line (time) Method
Annual Depreciation or Amort = Cost - Est. Sal value/ Est. Life in Yrs
Straight Line (Based on Usage) Method
Depreciation or Amortization Cost per Unit = Cost - Est. Sal Val./ Est. Units of Use
Accelerated Depreciation Method
- Declining - bal. method
- -Depreciation rate is double the straight-line rate
- —- = rate = 2 x straight-line
- Sum of the years’ digits method
- –Begins by summing the digits of an asset’s useful life.
- -Depreciation rate for the first year eq. the number of remaining useful years of the asset.
Characteristics of Long-lived Assets
Have long useful lives
Useful lives and fair values of these assets may change for various reasons
Intangible long-lived assets have no physical substance
Treatment of Expenditures asAssets versus as Expenses
Firms treat expenditures as:
Expenses in the period incurred
Assets by capitalizing cost
An asset if the firm:
Has acquired rights to future use as the result of a past transaction, and
Can measure or quantify the future benefits
Measurement of Acquisition Cost
Acquisition cost
Presumed to equal the asset’s fair value on the date of acquisition
Includes all costs incurred to prepare a long-lived asset for rendering services
Is either the fair value of the consideration given or the fair value of the asset received when the asset is acquired for noncash consideration
Includes the labor, material, overhead costs, and interest costs during constructions when asset is self constructed
Treatment of Acquisition Cost Over the Life of a Long-lived Asset
Assets with finite life
Portion of the cost recognized as an expense each period over the asset’s life
Asset with an indefinite life (the future benefit period cannot be estimated)
Cost is not recognized as an expense each period
Fundamental Concepts of Depreciation and Amortization
As the firm uses the asset, it treats a portion of the cost less salvage value of the asset as the cost of the service received
This is depreciation expense (if asset is tangible) or amortization expense (if asset is intangible)
Depreciation and amortization involve cost allocation, not valuation
Measurement of Depreciation and Amortization
Calculating depreciation or amortization of long-lived assets requires to:
Measure the depreciable or amortizable basis of the asset
Estimate its service (useful) life
Decide on the pattern of depreciation or amortization over the asset’s service life
Depreciable or Amortizable Basis
Based on the acquisition cost less the estimated salvage value of long-lived assets
Salvage value: Estimated amount expected to be received when the asset is disposed at the end of its service life
Impact of New Information
Depreciation and amortization are based on knowledge at the time of the initial acquisition
Methods should be updated when the following new information is available:
Changes in service lives or salvage values
Additional expenditures to maintain or improve the assets
Disposal of Assets
Sale of asset
Firm records an asset sale, eliminates debits and credits in accounts related to the asset, and recognize gain or loss
Abandonment of asset
Eliminates carrying value and recognizes loss equal to the carrying value of the asset
Trade-in an asset
Firms record trade-in transaction at the fair value of the asset surrendered
