Chapter 11: Depreciation, Impairments, and Depletion Flashcards
Modified Accelerated Cost Recovery System
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)
MACRS depreciation method by class
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
Optional Straight Line Method
Applies straight line method to MACRS recovery periods
Return on Assets
RoA
= Net income / average total assets
measures profitability
Profit margin on sales
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
Asset Turnover
How efficiently a company uses its assets
= net sales / average total assets
(average = beg + ending / 2)
varies by industry
PP&E Disclosures
- 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
Full cost concept (exploration costs)
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)
Write ups of recoveries of impairment
Allowable under IFRS, NOT under GAAP
UNLESS assets are being held for disposal
Successful efforts concept
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
Liquidating Dividends
Dividends greater than the amount of accumulated net income: return of the original investment
Journaling Liquidating Dividends
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
Journaling Depletion
Debit Inventory
Credit Asset
May use an accumulated depletion account, but it isn’t usual
Units of production method of depletion
Depreciation/ depletion per unit = (total cost - salvage value) / estimated total units available
Depreciation
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
Depletion
Reduction in cost of natural resources over a period of time
(allocation of cost of natural resource to expense?)
Amortization
Expiration of intangible assets