Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Theory of Financial Accounting I > Chapter 11: Depreciation, Impairments, and Depletion > Flashcards

Chapter 11: Depreciation, Impairments, and Depletion Flashcards

1
Q

Modified Accelerated Cost Recovery System

A

MACRS - depreciation for tax purposes

All depreciable assets placed into service in 1987 or later (subject to change)

  • laws mandate tax life for various property classes
    - tax life shorter than economic life: “recovery period
  • recovery on an accelerated basis
  • zero salvage value
  • use half-year convention (1/2 year depreciation in year of acquisition 1/2 year in year of disposal)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

MACRS depreciation method by class

A

3, 5, 7, 10 year classes: double declining balance method

15, 20 year classes: 150% declining balance method

27.5 & 39 year classes: straight line

the IRS publishes tables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Optional Straight Line Method

A

Applies straight line method to MACRS recovery periods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Return on Assets

A

RoA

= Net income / average total assets

measures profitability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Profit margin on sales

A

how profitably a company used assets during a given period of time

= net income / net sales

Return on assets = asset turnover x profit margin on sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Asset Turnover

A

How efficiently a company uses its assets

= net sales / average total assets

(average = beg + ending / 2)

varies by industry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

PP&E Disclosures

A
  • basis of valuation
  • current pledges / liens/ commitments (not offset against asset reported in liabilities section)
  • separate PP&E not currently employed (idle facilities) from active PP&E
  • depreciation expenses
  • balances of classes of depreciable assets
  • accumulated depreciation (by classes or total)
  • method(s) of depreciation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Full cost concept (exploration costs)

A

The cost of unsuccessful exploration (for a natural resource) is a cost required for successful exploration is all capitalized to the final project

(up to a ceiling of the present value of the company reserves)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Write ups of recoveries of impairment

A

Allowable under IFRS, NOT under GAAP

UNLESS assets are being held for disposal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Successful efforts concept

A

Only costs directly related to successful projects (exploration for natural resources) should be capitalized to the project

Cost of unsuccessful exploration goes to period charges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Liquidating Dividends

A

Dividends greater than the amount of accumulated net income: return of the original investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Journaling Liquidating Dividends

A

Debit Retained Earnings
Debit Paid in Capital in Excess of Par (for any amount related to returned capital)
Credit Cash

Must include information about makeup of dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Journaling Depletion

A

Debit Inventory
Credit Asset

May use an accumulated depletion account, but it isn’t usual

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Units of production method of depletion

A

Depreciation/ depletion per unit = (total cost - salvage value) / estimated total units available

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Depreciation

A

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

NOT about valuation, but rather about cost allocation

GAAP only requires it to be systematic and rational - beyond that companies can develop their own approach

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Depletion

A

Reduction in cost of natural resources over a period of time

(allocation of cost of natural resource to expense?)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Amortization

A

Expiration of intangible assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Fixed percentage of book value method of depletion

A

using a rate that depreciates the asset exactly to the salvage value at the end of its life

= 1 - nth root of (salvage value / acquisition cost)

n= life in years

NOT permitted for tax purposes

19
Q

Straight line depreciation

A

= cost less salvage value / estimated useful life

  • assumes usefulness / use is same each period
  • assumes maintenance and repair are the same each period
  • distorts rate of return (income / assets)
  • appropriate when “creeping obsolescence” is the primary reason for end of service life.
20
Q

Decreasing charge depreciation methods

A

AKA accelerated depreciation

  • higher depreciation cost in earlier periods
  • aligns with matching principles if benefits from the asset decline as asset ages
  • depreciation lower in later periods when repairs and maintenance are higher = more consistent costs

Methods:

  • sum of the years digits
  • declining balance (double declining balance)
21
Q

Sum-of-the-year’s-digits method of depreication

A

Depreciation based on a decreasing fraction of depreciable costs

Depreciable cost x (est. remaining life in years / sum of est. life in years)

Example if 5 years life, sum is: 5+4+3+2+1=15 so 1st year 5/15

For long lived asset, where n= life in years, sum = n(n+1)/2

22
Q

Declining balance method

A

Uses depreciation rate (percentage) that is some multiple of the straight line rate

does NOT deduct salvage value, rather in last year uses a plug to reach salvage value

book value x rate = depreciation expense

  • double declining balance = 2x straight line rate
  • may switch to straight line rate at the end of useful life

Straight line rate = 1/years of useful life

23
Q

Composite depreciation rate

A

= total (straight line) depreciation per user / total cost of assets

if a new asset is added to the group must recompute the depreciation rate

24
Q

Composite method of depreciation

A

used for group of assets when assets are dissimilar and have different lives

group depreciated at composite rate to salvage / residual value

gain or loss from asset required before service life of the group is over buried in accumulated depreciation account (okay because it evens out over time)

Debits to accumulated depreciation adjusted by gain/ loss amount

25
Q

Composite life

A

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

26
Q

Group method of depreciation

A

see composite method of depreciation

when assets are similar in nature and have approximately the same useful life

use disclosures to explain

27
Q

IFRS component depreciation

A

Required by IFRS

28
Q

Depreciable Base

A

Original cost less salvage unit

salvage value: amount company expects to receive when it sells the asset or removes it from service (sometimes salvage value is $0)

29
Q

Service life of an asset

A

Physical factors lead to the retirement of assets (wear and tear). sets the outside limit of service life

Economic factors that contribute:

  • inadequacy for company purposes
  • supersession (replacement with better option)
  • obsolescence (catch all for the rest)
30
Q

Methods of depreciation

A
  • Activity method (units of use or production)
  • straight line method
  • decreasing charge method (accelerated)
    - sum of the year’s digits
    - declining balance
  • special depreciation methods
    - group and composite
    - hybrid / combination
31
Q

Activity method of depreciation

A

AKA variable charge / units-of-production

rather than time uses input or output to calculate depreciation

= (cost - salvage value) x units for period / total life in units

Only appropriate for certain items

Matches expenses in the same period as revenues, good for when loss of utility of an asset results from use / production

32
Q

Half-year convention

A

1/2 year of depreciation charged in year of acquisition, 1/2 year of depreciation in year of disposal

33
Q

Partial period depreciation

A

Determine expense for the whole year and then prorate between partial periods
- unless otherwise stipulated calculate to the nearest month

Alternate:

  • may not depreciate in 1st partial year and 1st year depreciation 1st full year of ownership
  • use 1/2 year convention
  • depreciate full year in 1st partial year and not in year of disposal
34
Q

Depletion

A

Pattern of allocation for the cost of natural resources

Cost of depletion base:

  • acquisition cost
  • exploration costs
  • development costs
  • restoration costs (asset retirement obligation less salvage value)

then depletion calculated using units of production method

35
Q

Development Costs for natural resources

A

Divided in two

Tangible equipment costs: usually held as separate assets with own depreciation accounts
- if un-movable from natural resource still a separate asset but may be depreciated over life of resource if shorter

Intangible development costs added to depletion base (ex: drilling costs)

36
Q

Exploration costs for natural resources

A

May be capitalized into depletion base if substantial

often just expensed

some controversy involved

37
Q

Undeveloped property account

A

Holding account for acquisition costs of natural resources prior to exploration

  • if exploration successful costs are assigned to natural resource
  • if unsuccessful then written off as a loss
38
Q

Natural Resources

A

AKA wasting assets

  • complete consumption (removal) of asset
  • replacement only by an act of nature

CONSUMED over the period of use - physical characteristics depleted

39
Q

Impairment loss of an asset held for disposal

A

-Assets held for disposal are like inventory and should be reported at lower of cost or net-realizable value

  • continued reevaluation till sale - can write the asset up or down as long as never higher than pre-impairment carrying amount
  • gain or loss in income from continued operations
  • no further depreciation
  • loss= carrying value - fair value - cost of disposal
40
Q

Revising depreciation rate

A

Changes only made in current and following periods - no changes to previous depreciation

following depreciation changes will be based on remaining book value

41
Q

Impairments

A

Write offs to long lived assets

  • significant decrease in fair value
  • significant change in asset use
  • adverse legal factors/ business climate
  • accumulation of costs significantly in excess or original amount expected
  • projection of continuing losses associated with asset
42
Q

Recoverability test

A

Used to determine if an impairment to an asset has occurred
- estimates clash flows expected from use & disposition of asset
- if net cash flows < carrying amount then asset is impaired
- if net cash flows are >= carrying amount then no impairment
Cash flows are not discounted for present value

43
Q

Impairment loss on asset held for use

A

Amount by which carrying amount of asset exceeds its fair value

Fair value determined by:

  • active market
  • if no active market then use present value of future cash flows

Loss on impairment reported in other expenses and losses on income statement

Debit Loss on Impairment
Credit Accumulated Depreciation

44
Q

Writing down impairment on an asset

A

Debit loss on impairment
Credit accumulated depreciation

Reported in other expenses and losses section of the income statement

Part of continuing operations
must disclose how impairment was determined

Theory of Financial Accounting I (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions