Depreciable Assets and Depreciation

Question 1

How is the matching principle applied to long-lived assets that are not held for sale in the ordinary course of business?

Answer 1

Depreciation, amortization, or depletion

Question 2

Types of depreciation

Answer 2

1. Physical depreciation

2. Functional depreciation

Question 3

Physical depreciation

Answer 3

Related to an asset’s deterioration and wear over a period of time

Question 4

Functional depreciation

Answer 4

Arises from obsolescence or inadequacy of the asset to perform efficiently

Question 5

What might cause obsolescence?

Answer 5

Diminished demand for the product that the depreciable asset produces or from the availability of a new depreciable asset that can perform the same function for substantially less cost

Question 6

Salvage/residual value

Answer 6

An estimate of the amount that will be realized at the end of the useful life of a depreciable asset

Question 7

Estimated useful life

Answer 7

The period of time over which an asset’s cost will be depreciated

Question 8

Goal of depreciation methods

Answer 8

To provide for a reasonable, consistent matching of revenue and expense by systematically allocating the cost of the depreciable asset over its estimated useful life

Question 9

Depreciable base

Answer 9

Cost - Salvage/Residual value = Depreciable base

Question 10

What are advantages of component depreciation over composite depreciation?

Answer 10

1. Depreciation expense for the year would be more accurate

2. Repair and maintenance expense would be more accurate b/c replacements would be excluded

Question 11

Why is component depreciation not available for MACRS recovery property for tax purposes?

Answer 11

Because depreciation expense under the component method is generally higher and MACRS is already high

Question 12

Does IFRS require component or composite depreciation?

Answer 12

Component

Question 13

Component depreciation

Answer 13

Recording depreciation for each component of a unit (i.e. parts of a machine)

Question 14

Composite vs. Group Depreciation

Answer 14

Composite = Dissimilar assets

Group = Similar assets

The process of averaging the economic lives of a number of property units and depreciation the entire class of assets over a single

Question 15

Under composite/group depreciation, are gains and losses recognized when an asset in the group is retired/sold?

Answer 15

No. If the average service life of the group has not been reached when asset is retire, gain/loss absorbed in A/D

Question 16

What are the basic depreciation methods?

Answer 16

1. Straight-line
2. Sum-of-the-Years’-Digits
3. Declining balance
4. Units-of-production

Question 17

Straight-line depreciation

Answer 17

Service potential declines with time

(Cost - Salvage Value) / Estimated useful life = Depreciation

Question 18

Sum-of-the-years’-digits

Answer 18

One of the accelerated methods of depreciation that provides higher depreciation expense in early years and lower in later years

Question 19

Calculate sum-of-years’-digits

Answer 19

[n(n+1)]/2

or

1+2+3+4+5 = 15 (for 5 years)

Question 20

Calculated depreciation expense under sum-of-years’-digits

Answer 20

Depreciation expense = (Cost - Salvage value) x (Remaining life of asset / Sum-of-years’ digits)

Question 21

Declining balance

Answer 21

Asset subject to rapid obsolescence (accelerated method of depreciation)

Question 22

Calculate double-declining balance depreciation

Answer 22

Depreciation expense = 2 x (1/N) x (Cost - A/D)

Ignore salvage value but cannot depreciate below salvage value

Question 23

Calculate 1.5 times declining balance depreciation

Answer 23

Depreciation expense = 1.5 x (1/N) x (Cost - A/D)

Question 24

Units-of-production (productive output)

Answer 24

Service potential declines with use

Question 25

Calculate depreciation expense under units-of-production

Answer 25

Step 1 —
(Cost - Salvage value) / Estimated units or hours = Rater per unit or hour

Step 2 —
Rate per unit or hour x # of units produced or hours worked = Depreciation expense

Question 26

J/E for total and permanent impairment of asset

Answer 26

Dr. A/D
Dr. Loss due to impairment
Cr. Asset at full cost

Question 27

What disclosures should be made regarding depreciable assets and depreciation?

Answer 27

1. Depreciation expense for period
2. Balance of major classes of depreciable assets by nature/function
3. A/D allowances by classes or in total
4. Methods used, by major classes, in computing depreciation

Question 28

Depletion

Answer 28

Allocation of the cost of wasting natural resources such as oil, gas, timber and minerals to the production process

Question 29

Purchase cost (depletion)

Answer 29

Includes any expenditures necessary to purchase and then prepare the land for the removal of resources (drilling, tunnels, shafts)

Question 30

Residual value

Answer 30

Monetary worth of a depleted asset after the resources have been removed

Question 31

Depletion base

Answer 31

Cost - Residual value

Question 32

Methods of depletion

Answer 32

1. Cost depletion (GAAP)

2. Percentage depletion (tax only)

Question 33

Cost depletion

Answer 33

Cost - Salvage value / Estimated recoverable unites = Cost depletion rate

Cost depletion rate x units produced => allocates costs of production

Question 34

Percentage depletion

Answer 34

Based on percentage of sales

Can exceed cost depletion

Limited to 50% of NI from depletion property computed before percentage depletion allowance

Question 35

Unit depletion rate

Answer 35

Amount of depletion recognized per unit extracted

Unit depletion rate = Depletion base / Estimated removable units

Question 36

Calculation of depletion base

Answer 36

Cost to purchase property + Development costs to prepare the land for extraction + Any estimated restoration costs - Residual value of land after resources are extracted

Question 37

Total depletion

Answer 37

Total depletion = Unit depletion rate x Number of units extracted

Question 38

Calculate depletion on land

REAL

Answer 38

Residual value (subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price

Question 39

When permanent impairment occurs, how is the loss recorded?

Answer 39

Credited to accumulated depreciation

Question 40

Should estimated restoration costs be added to or subtracted from the depletion base?

Answer 40

Added to so that the amount of depletion charged to expense over the life of the mining operation will include it