Chapter 11: Depreciation, Impairments, and Depletion Flashcards
What is depreciation?
System used to allocate costs of property, plant, and equipment to accounting periods
Depreciation calculation
Depreciation = Rate x Base
Straight Line Depreciation Method
Most common, allowed for taxes but rarely used
Straight Line Depreciation Rate
1/useful life
Straight Line Depreciation Base
Cost - salvage
Straight Line Depreciation Calculation
(Cost - Salvage)/Useful Life
Sum-of-the-Years Method Depreciation
Accelerated Depreciation method, must be used for full 12 months
Sum-of-the-Years Depreciation Rate
(UL-(year-1))/(Useful Life(Useful Life +1)/2)
Sum-of-the-Years Depreciation Base
Cost - Salvage (straight-line base)
Double Declining Balance Depreciation Method
Most accelerated Method
Double-Declining Balance Depreciation Rate
2/Useful Life
Double Declining Balance Depreciation Base
Book value, Cost - Accumulated Depreciation
Units of Production Depreciation Method
As use some assets, they tend to wear out
Units of Production Depreciation Base
Number of units produced, hours used, miles driven etc. for current period
Units of Production Depreciation Rate
(Cost-Salvage)/Estimated Useful Life in Units
Partial Year Depreciation
Record depreciation for number of months held divided by 12 including months where asset was purchased prior to or sold after 15th of month (do not apply for production methods
Recording of Depreciation
Increases expenses with depreciation expense, decreases assets by increasing contra asset accumulated depreciation
Depreciation methods allowed for taxes
straight line method (half year convention in first year), Modified Accelerated Cost Recovery System (MACRS)
MACRS
tax life mandated, cost recovery on accelerated basis, salvage value is 0
Depletion
Way of allocating cost of wasting assets, systematic allocation of cost of natural resources to periods that benefit from use (similar to units of production method)
Depletion Base
Number of units extracted during current period
Depletion Rate
(Total Cost - Residual Value)/Estimated Units Available
Recording of Depletion
Increases asset (inventory) rather than expense account
Recording of Depletion When Asset Sold
Inventory increases COGS
What is included in cost of assets subject to depletion?
Acquisition costs, Exploration costs (full cost approach - added to cost of all natural resources, successful efforts - use money included in actually finding natural resource), Development Costs (if can seperate asset from land, not included), and Restoration costs
