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ACCT 301 > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

Depreciation is

A

Cost allocation

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2
Q

Depreciation

A

Accounting process of allocating costs of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

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3
Q

Expiration of intangible assets such as patents or copyrights is called

A

Amortization

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4
Q

Fixed assets

A

Depreciation expense

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5
Q

Intangibles

A

Amortization expense

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6
Q

Natural resources

A

Deletion expense

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7
Q

What are the three questions in the depreciation prcoess?

A
  1. What is the depreciable base to be used for asset
  2. What is the assets useful life
  3. What method of cost apportionment is best for the asset?
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8
Q

Salvage value

A

Estimated amount that a company will receive when it sells the asset or removes it from service

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9
Q

The service life differs from

A

Physical life

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10
Q

What are the two reasons companies retire assets

A

Physical factors (casualty or expiration of physical life)

Economic factors (obsolescence)

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11
Q

Economic or functional factors are classified into 3 categories of

A
  1. Inadequacy
    - when asset is not as useful because demand of firm have changed
  2. Super session
    - replacement of one asset with another more efficient and economical asset
  3. Obsolescence
    - catch all for situations not involving 1 and 2.
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12
Q

The better the maintenance the longer the the life of

A

Asset

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13
Q

In most cases the useful life of asset is based on

A

Past experiences with the same or similar assets

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14
Q

Activity method also called variable charge or units of production approach

A

Assumes that the depreciation is a function of use or productivity instead of the passage of time

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15
Q

What is the major limitation of the activity method?

A

It is inappropriate in situations in which depreciation is a function of time instead of activity

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16
Q

When economic or functional factors affect the asset what happens?

A

The activity method those its significance

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17
Q

Another problem with activity method is

A

Is the difficulty of estimating units of output or service hours received

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18
Q

Straight line method

A

Considers depreciation as a function of time rather than a function of usage

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19
Q

Why do companies use the straight line method?

A

Bc of its simplicity

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20
Q

Two major objections to straight line is

A
  1. Assets economic usefulness is the same each year

2. Maintenance and repair expense is essentially the same each period

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21
Q

Straight line provides a distortions in

A

Rate of return analysis (income/assets) develop

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22
Q

Decreasing charge methods

A

Provides a for a higher depreciation cost in the earlier years and lower charges in the later periods

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23
Q

Decreasing charge method is often called accelerated depreciation methods because

A

These methods allow for higher early year charges than in straight line method

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24
Q

What is the rationale for the accelerated methods?

A

Companies should charge more depreciation in the earlier. Years because the asset is more productive in the earlier years

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25
Q

Accelerate methods provide

A

Constant cost because the depreciation charge is lower in the later periods at the time when repair and maintenance costs are often higher

26
Q

Sum of the years digits method

A

Results in a decreasing depreciation charge based on decreasing fraction of depreciable costs

27
Q

Declining balance method

A

Utilizes a depreciation rate (expressed as %) that is some multiple of the straight line method

28
Q

Declining method does not deduct what

A

Salvage value in computing deprecation base

29
Q

Double declining method

A

Depreciates assets at twice

30
Q

Two methods of depreciating multiple asset accounts

A

Group method

Composite method

31
Q

Companies frequently use group method

A

When the assets are similar in nature and have approximately the same useful of lives

32
Q

They use composite approach when

A

Assets are dissimilar and have different lives

33
Q

Composite depreciation rate

A

Depreciation per year by total cost of assets

34
Q

Composite life

A

The length of time it takes a company to depreciate its assets on a composite basis

35
Q

Unit method (depreciation of single assets) has several advantages over group or composite methods

A
  1. Simplifies the computation mathematically
  2. Identifies gains and losses on disposal
  3. Isolates depreciation on idle equipment
  4. Represents the best estimate of the depreciation of each assets o
36
Q

Companies can create their own methods , GAAP requires only

A

That the method result in the allocation of an assets cost over the assets life in a systematic and rational manner

37
Q

How do companies compute depreciation expense for partial periods?

A

Companies must determine t he depreciation expense for the full year and then prorate this depreciation expense between the two periods evolved

38
Q

Companies normally compute depreciation on

A

Basis of the nearest full month

39
Q

Depreciation does not involve what?

A

A current cash flow

40
Q

Depreciation does not provide what for. The replacement of. Assets?

A

Funds

41
Q

The funds for replacement of the assets come from the

A

Revenues ( generated through the use of asset?

42
Q

The changes in estimate should be recorded when

A

In the current and prospective periods

There should be no changes in the prior periods

And there is no adjusting opening balances or attempt to catch up for period periods

43
Q

Why is there no adjustment. Or catching up for prior periods?

A

Changes in estimates are continual and inherent part of the estimation process

44
Q

Impairments

A

Considering the write off of their long lived assets

45
Q

What are events and changes in circumstances that might lead to an impairment?

A
  1. A significant decrease in the FV of asset
  2. A significant change in the extent or manner in which an asset is used
  3. A significant adverse change in legal factors or in the business climate that affects value of asset
  4. An accumulation of costs significantly in excess of amount originally expected to acquire or construct an asset
  5. A projection or forecast that demonstrates continuing losses associated with an asset
46
Q

The events or changes in circumstances indicate that the company may not be able to

A

Record the carrying amount of the asset

47
Q

Recoverability test

A

Is used to determined whether an impairment has occurred or not

48
Q

Steps of recoverability test

A
  1. Estimate future cash flows expected from use of asset and its eventual disposition

(If sum of expected cash flow < carrying amount = impaired)

Sum expected cash flow is > or equal to carrying amount = no impairment

49
Q

Recoverability test relies on a basic presumption

A

Balance sheet should report long lived assets at no more than carrying amounts that are recoverable

50
Q

What is the impairment loss?

A

Carrying value of asset > FV

51
Q

Fair value of asset is measured based on

A

Market price if an activate market for asset exists

52
Q

If no market exists then UPS uses

A

PV of expected future cash flows to determine fair value

53
Q

After recording an impairment loss , the reduced carrying amount of asset becomes what?

A

New cost basis

54
Q

A company does not change the new cost basis except when

A

For depreciation or amortization in future periods for additional impairments

55
Q

May not restore an impairment loss for an

A

Asset held for use

56
Q

Assets that are held for disposal are like inventory should they should be reported at

A

Lower of cost or net realizable value

57
Q

You can write up or down an asset held for disposal in future periods as long as

A

Carrying value after write up never exceeds the carrying amount of asset before impairment

58
Q

Losses and gains related to impaired assets should be recorded as part of

A

Income from continuing operations

59
Q

Because of significant impact on financial statements of depreciation methods used, the following should be disclosed

A
  1. Depreciation expense for the period
  2. Balances eye of major classes of depreciable assets by nature and function
  3. Accumulated depreciation, either by major classes of depreciable assets or in total
  4. A general descruption of method or methods used in computing depreciating with respect to major classes of depreciable assets
60
Q

Asset turnover

A

How efficiently a company uses its assets to generate sales

ACCT 301 (12 decks)

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