F3 - M5 - PP&E: Depreciation and Disposal Flashcards
Depreciation
Matching revenue and expenses to LONG LIVED ASSETS, not held for sale
Depreciation, Amortization or Depletion
Usually asset is placed into service during the year, compute part of the year
Types of Depreciation
Physical Depreciation - Assets deterioration and wear over time
Functional Depreciation - “obsolescence” of asset to perform efficiently
Salvage Value
“Estimate” amount will be realized at the end of the useful life of a depreciable asset
Estimated Useful Life
“Estimate” period of time over which an asset’s cost will be depreciated
US GAAP vs IFRS
IFRS - depreciation method reflect pattern of fixed asset consumption; COMPONENT DEPRECIATION, more accurate type of depreciation by applying different depreciation schedules to parts of a fixed asset
US GAAP - Doesn’t matter
Component Depreciation
IFRS required, allowed with US GAAP but not common
Different depreciation schedules by asset
Composite or Group Depreciation
process of averaging economic lives to simplifying record keeping
Can use any acceptable method such as straight-line, sum of the years digits and declining balance methods
Asset Retirement
Sold / retired, No Gain or Loss on I/S
Dr. Cash
Dr. Accumulated Depreciation “Plug”
Cr. Asset
Average Composite Life
ACL = Depreciable Cost / Annual Depreciation
Depreciable Cost = Total Cost minus Estimated Salvage Value
Basic Depreciation Methods
Goal = Reasonable, Consistent matching revenue and expense, allocating the cost of depreciable asset over its estimated life
Straight-Line Depreciation
Sum of the Years Digits Depreciation
Straight-Line Depreciation
Service potential declines with time
- (Cost - Salvage) / estimated useful life x fraction of year
Sum of the Years Digits Depreciation
Accelerated Method; higher depreciation expense in early years and lower in later
(Cost - Salvage Value) x Remaining Life of Asset / Sum of the years digits
Sum of the years digits = N (N+1)/2
N = Estimated Life
5 Years = 5(5+1)/2 = 15 Sum of the years digits
Units of Production (Output) Depreciation
Estimated production capability of an asset; expressed in rate per unit or hour; Converts depr. to a variable cost; Ex if airplane is not being used, its not being depr.
(Cost - Salvage value) / Estimated units or hours
Declining Balance Depreciation
Asset subject to rapid obsolescence; Salvaged Ignored in calculation of annual expense
2 x 1/n x (cost - accumulated depreciation)
Constant Rate of Depreciation; Example: 10,000, 10 year depr
- 10k x 20% = 2000; NBV = 8000
- 8k x 20= 1600; NBV = 6400
