F3 M5 Flashcards
Depreciation, disposal, and impairment
straight line depreciation
cost - salvage value/estimated useful life
*watch out for partial yrs
sum of years digits depreciation
(cost - salvage value) * (remaining life of asset/sum of years digits)
sum of years digits calculation
n * (n+1)/2
units of production rate per unit or hour
cost - salvage value/estimated units or hours
units of production depreciation
rate per unit or hour * number of units produced (or hours worked)
declining balance depreciation
2 * (1/n) * (cost - accumulated depreciation)
*no salvage value for DB
journal entry to write-off depreciated asset
Dr. Accumulated depreciation
Cr. Old asset at full cost
journal entry for total and permanent impairment
Dr. Accumulated depreciation
Dr. Loss due to impairment
Cr. Asset at full cost
disclosures for depreciation and depletion
1) depreciation expense for the period
2) balance of major classes of depreciable assets by nature or function
3) accumulated depreciation allowances by classes or in total
4) methods used, by major classes, in computing depreciation
purchase cost for depletion
1) purchase price
2) cost to prepare land for removal of resources
3) drilling costs
4) intangible development costs
5) prepare asset for harvest
depletion base
cost to purchase property
+ development costs to prepare land for extraction
+ any estimated restoration costs
- residual value of land after resources extracted
percentage depletion
1) based on percentage of sales
2) allowed by Congress as tax deduction for risky business
3) % depletion can exceed cost depletion
4) limited to 50% of net income from depletion property computed before % depletion allowance
total depletion
unit depletion rate * number of units extracted
unit depletion rate
depletion base/estimated recoverable units
recognition of depletion
if all units extracted that have not been sold, depletion allocated between COGS and ending inventory
amt of depletion included in COGS
unit depletion rate * number of units sold
-depletion applicable to units extracted but not sold allocated to inventory as direct materials
when an impairment loss needs to be recognized
when the sum of undiscounted expected (future) cash flows is less than the carrying amt
calculation of impairment loss
1) sum of undiscounted expected (future) cash flows - carrying amt
2) if positive, no impairment
3) if negative, impairment
4) if asset held for use: FV or PV future net cash flows - net carrying value
5) write down asset, depreciate new cost, restoration not permitted
6) if asset held to dispose: FV or PV future net cash flows - net carrying value + cost of disposal
7) write asset down, no depreciation taken, restoration permitted
reporting impairment loss
-reported as component of income from continuing operations
-recognized be reducing carrying value to fair value
-restoration of previously recognized impairment losses prohibited under U.S. GAAP unless asset held for disposal
what happens when a permanent impairment occurs?
book value is reduced and a loss incurred. Loss is credited to accumulated depreciation and current year depreciation added too.
