Chapter 12 - Depreciation, Impairment, and Depletion Flashcards
In regards to Depreciation, what is the difference b/w the group method and the composite approach?
Both methods involve depreciating multiple-asset accounts together.
The group method is used when the assets are similar in nature and have approximately the same useful lives.
The composite approach is used when the assets are dissimilar and have different lives.
How do you calculate the depreciation charge using the Activity Method?
Total Estimated Hours
How do you calculate the depreciation charge using the Straight-Line Method?
Estimated Service Life
Which depreciation method does not deduct the salvage value in computing the depreciation base?
The Declining-Balance Method
How do you calculate the composite depreciation rate?
Total Original Cost of all Assets in Composite group
What is the composite life and how is it calculated?
The length of time it takes a company to depreciate its assets on a composite basis.
Depreciation Base of All Assets / Depreciation per Year of All Assets (straight-line)
OR
Depreciation per Year of All Assets (straight-line) x Composite Depreciation Rate
How does recognizing Gain or Loss on disposal of assets differ between Group Depreciation Methods and Unit (single asset) Depreciation Methods?
Unit (single asset) Depreciation Methods recognize gain or loss on disposal
Group Depreciation Methods bury any gain or loss in the Accumulated Depreciation account. This averages out as some assets in the group will be retired before the average service life and others after the average life.
How does a company choose the right depreciation method for their asset?
The method that best matches revenues with expenses should be used.
For example, if revenues generated by the asset are constant over its useful life, select straight-line depreciation. On the other hand, if revenues are higher (or lower) at the beginning of the asset’s life, then use a decreasing (increasing) method.
How does IFRS compare to GAAP in regards to long-lived asset impairment?
IFRS also uses a fair value test to measure the impairment loss. However, IFRS does not use the first stage recoverability test used under GAAP (comparing the undiscounted cash flows to the carrying amount). As a result, the IFRS test is more strict than GAAP.
How does IFRS compare to GAAP in regards to write-ups for subsequent recoveries of impairment?
IFRS permits write-ups for subsequent recoveries of impairment, back up to the original amount before the impairment. GAAP prohibits those write-ups except for assets to be disposed of.
How should companies report assets held for disposal?
Like Inventory: companies should report them at the lower-of-cost-or-net-realizable-value (FV less costs to sell)
What are the four factors that go into computing the depletion base?
- Acquisition Cost
- Exploration Cost
- Development Cost
- Restoration Cost
What are considered Acquisition Cost for natural resources?
Price to obtain property rights to search and find an undiscovered resource
Could also be price paid for an already discovered resource
Includes lease payments for property and royalty payments to the owner of the property
These costs are only assigned to a natural resource if exploration efforts are successful. Otherwise, these costs are written off as a loss.
What are considered Exploration Costs for natural resources?
As soon as a company has the rights to use the property, it incurs these costs to find the resource.
What are considered Development Costs for natural resources?
These costs are divided into two parts:
1) Tangible Equipment
Cost not included in depletion base
Ex. Heavy equipment that is deprecated on its own already
2) Intangible Equipment
Cost included in depletion base
Ex. drilling costs, tunnels, shafts, wells; have no tangible characteristics but are needed for the production of the natural resource)
