DEPLETION AND DEPRECIATION Flashcards
Defined as the decrease in the value of a property, due to the passage of time
Depreciation
This must always be included in the cost of production of any product or the rendering of any service where equipment is used
Depreciation
Enumerate the types of depreciation
- Physical depreciation
- Functional depreciation
- Changes in the price levels of similar property
It is caused by deterioration due to the effects of various chemical and mechanical factors on materials
Physical depreciation
It is due to a decrease in the demand for the function of the equipment for which it was designed
Functional depreciation
It depends upon the physical or economic life of the equipment and its first cost
Depreciation cost
The length of time during which an equipment is capable of performing its function
Physical life
The length of time during which an equipment will operate at a satisfactory profit
Economic life
Sometimes called second-hand value, is defined to be the amount for which the equipment or machine can be sold as second hand
Salvage value
The amount the equipment can be sold for, when disposed off as junk
Scrap or junk
Payments to the ____________ should be equal to the loss in value due to depreciation
depreciation fund
It is simple and is more widely used than any other methods
Straight-line Formula
The basic assumption for this method is that the annual cost of depreciation is a constant percentage of the salvage value at the beginning of the year
Matheson Formula
It is also relatively simple, though it will require the use of annuity tables in the absence of the electronic calculator
Sinking Fund Formula
It is generally the method used for economy study purposes
Sinking Fund Formula
It provides very rapid depreciation during the early years of life of property, and therefore enables faster recovery of capital
Sum of the Years-Digits (SYD) Method
Depreciation during any year is charged on the basis of actual service rendered or actual units produced by the property during the year
Service-Output Method
It is an approximate method, because it adds and subtracts amounts which do not occur at the same point in time
Straight-Line Plus Average Interest Formula
In this method, the depreciation cost in any year is a constant ratio of the book value at the beginning of the year
Double-Rate Declining-Balance Method
This is confined to assets where the major factor in depreciation is wear and tear arising from use
Operating Day Method
A chance is made in the investment account when the property is retired or replaced
Retirement Method
This method involves the write-off of annual depreciation determined by officers of the company who possess the required experience and technical knowledge
Annual Inventory Method
In this method, the loss in value is considered to be directly proportional to the age of the property
Straight-line Formula
In this method it is assumed that the total depreciation that has taken place is directly proportional to the quantity of the output the property up to that time
Service-Output Method
For this method, it is assumed that the amount of capital recovered each year is on a straight-line basis
Straight-line plus average interest formula
They consider the write-off on only one asset at a time
unit or item depreciation
Consists of the computation of a single annual depreciation charge for a group of similar assets using their average life
Group depreciation method
If the class consists of dissimilar assets, the depreciation computed is termed _____
composite depreciation
The annual charge set aside in the fund is called ____ rather than depreciation cost
depletion cost
The depletion charge depends upon the cost of the property and the number of units in the property
Unit or Factor Method
This allows a fixed percentage of gross income received during a year to be the depletion charge
Percentage or Depletion Allowance Method
The theoretical depletion charge for a year is usually determined by these two methods
- Unit or Factor Method
- Percentage or Depletion Allowance Method
