Depreciable assets and depreciation Flashcards
Physical Depreciation
Related to an asset’s deterioration and wear over a period of time.
Functional Depreciation
Comes from obsolescence or inadequacy of the asset to perform efficiently. Obsolescence may result from 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.
Salvage Value
Salvage or residual value is an estimate of the amt that will be realized at the end of the useful life of a depreciable asset.
Estimated Useful Life
The period of time over which an asset’s cost will be depreciated. It may be revised at any time but any revision must be accounted for prospectively, in current and future periods only (change in estimate).
Advantages of Component Depreciation
- Depreciation exp for the year would be more accurate bc each component item would be depreciated over its useful life.
- Repair and maintenance expense would be more accurate bc replacements of components would be excluded.
Component Depreciation
Not available for MACRS recovery property for tax purposes bc depreciation exp under the component method is generally higher and MACRS is already high. Is available when straight-line depreciation is elected.
Required by IFRS.
Composite (dissimilar assets) or Group (similar assets) Depreciation
This is the process of averaging the economic lives of a number of property units and depreciating the entire class of assets over a single life, thus simplifying record keeping of assets and depreciation calculations.
No Gain or Loss is Recognized When One Asset in the Group is Retired/Sold
When a group or composite asset is sold or retired, the accum. depreciation is treated differently than the accumulated depreciation of a single asset. The accumulated depreciation account is debited (credited) for the difference between the original cost and the cash received.
Straight-Line Depreciation
- Service potential declines with time. Estimated useful life is usually stated in periods of time, such as years or months.
Cost - Salvage Value/Estimated Useful Life
Sum-of-the-Years’-Digits
The sum of the year’s digits method is one of the accelerated methods of depreciation that provides higher depreciation expense in the early years and lower chargers in the later years.
(Cost - Salvage) * (Remaining life/sum of yrs digits)
Sum of yrs digits = n(n+1)/2
Declining Balance
Asset subject to rapid obsolescence
Most common is double-declining-balance method.
Under double-declining balance, each year’s depreciation rate is double the straight-line rate. In the final year, the asset is depreciated to its salvage value, if any. Do not depreciate below salvage value.
2/N * (Cost - AD)
Units-of-Production
Service potential declines with use.
The units-of-production method relates depreciation to the estimated production capability of an asset and is expressed in a rate per unit or hour.
Step 1: (Cost - Salvage)/(Estimated units/hrs) = Rate per unit/hour
Step 2: Rate per unit * # of units produced = Dep. Exp.
Partial Year Depreciation
When an asset is placed in service during the year, the depreciation expense is taken only for the portion of the year that the asset is used.
Depletion
The allocation of the cost of wasting natural resources such as oil, gas, timber, and minerals to the production process.
Cost Depletion Method (GAAP)
Base/Estimated Recoverable Units = Cost Depletion Rate –> multiplied by units produced to allocate the costs to production.
