Chapter 9 Flashcards
Depreciation
is the systematic allocation of the cost of an operational asset over its useful life
What does depreciation not mean?
the accumulation of cash for the replacement of an asset
-it does not mean wear and tear and obsolescence
What do we depreciate?
- building
- equipment
- automobiles
- furniture
- land improvements
- leasehold improvements
What do we never depreciate?
LAND!!!!!
Do we record appreciation?
no!!!!!!
What is included in cost?
- acquisition cost: everything to get the asset ready to use except interest
- remove nay purchase discount
- installation fees
- test runs
- transportation
Why do we depreciate?
expense recognition concept(matching)
-expense of using the the asset is recorded in the period of revenue
What is razing added to?
-added to the cost of land
What is the adjusted journal entry time period for this section?
monthly and quarterly
What is the adjusted entry?
Dr: depreciation expense
Cr:Accumulated Depreciation
What is depreciation expense?
represents an estimate of how much of the estimate was used up this period
What type of asset is accumulated depreciation?
Discuss?
contra asset
represents how much has been used up since it was acquired
What is the formula for book value?
cost minus accumulated depreciation
Three methods of depreciation
- straight line
- double declining balance
- units of production
What is the formula for straight line?
(cost-salvage)/useful life= depreciation expense
Double Declining Balance
- results in higher depreciation in the early years
- used mostly for tax purposes
units of activity method
- useful life is expressed in terms of the total units of production or the use expected from the asset
- usually suited to factory machinery
- measure production in terms of units of output or machine hours used in operating machinery
examples: delivery equipment(miles driven)
airplanes(hours in use)
-not suitable for building or furniture
The Fees for Land
1) cash price
2) title and attorney’s fees
3) real estate brokers’ commission
4) accrued property taxes and other liens assumed by the purchaser
Discuss the what ultimately true about the depreciation methods?
-total depreciation expense is the same for all of them
Can you use different methods for different purposes?
-yes
Discuss deferred tax account
-creating a difference on the tax return an income statement
Revenue Expenditures(aka)
- expenses
- ordinary repairs and maintenance
Capital expenditures(aka)
-assets
- seldom occur
- large amounts of $$$$$$
- extended life
- greater efficiency
Depreciation is important to what time periods?
-future time periods
Depletion
systematic allocation of the cost of a natural resource to future periods in which asses contribute services
dr: depletion expense
cr: accumulated depletion or asset
Amortization
systematic allocation of the cost of an intangible asset to future periods in which the assets contribute services
dr: amortization expense
cr: accumulated amortization or asset
Points on Intagible Assets
- have no physical substance
- provide future benefits
- benefits are derived from legal rights
- must acquired so they have a cost
- have a limited life
Examples of Intangible Assets
Examples of Intangible Assets
Research and Development
- costs are expensed in the period incurred
- patents have to be purchased or defended to be an asset
-those developed in-house are treated as expenses
Others names for salvage value
- residual value
- salvage value
