F3 - M5 - PP&E: Depreciation, Disposal, and Impairment Flashcards
What is the difference between physical depreciation and functional depreciation?
Physical Depreciation - Relates to an asset’s deterioration and wear and tear over a period.
Functional Depreciation - Arises from obsolescence or inadequacy of the asset to perform efficiently.
What is salvage value?
The amount that you believe will be realized from the asset at the end of the useful life.
Assets should not be depreciated below this value.
Is the component and composite depreciation required under US GAAP?
No it is an option but not required. Required under IFRS.
What is component depreciation?
This is when instead of capitalizing one single asset, you break up the asset into parts and depreciate each part separately.
Lets say you have a generator, and in that generator there is a motor. You can separate the cost of the generator and the motor and depreciate those separately.
What is composite depreciation?
Composite depreciation, you can average the economic lives of a number of assets and depreciate the entire class of assets over a single life.
If you sell one of the items from that class, then you would debit cash, credit cost, and the plug would be accumulated depreciation, No gain or loss.
How would you calculate depreciation for a composite asset?
If you have one asset that has a cost of 550,000 with an estimated useful life of 20, and another asset that cost 200,000 that has an estimated useful life of 15, here is how you would do it.
Take the 550,000/20 to get the annual life of 27,500
Take the 200,000/15 to get the annual life of 13,333
Take the total cost of 750,000/40,833 to get the useful life of 18
Depreciation expense is normally taken for a portion of the year, depending when it is placed in service. What are the other two ways someone can depreciate a new asset?
Half year convention - They take half of the depreciation for the year the purchase it, and take the other half on the assets final year.
No depreciation in the acquisition year, and a full depreciation on the diposal or final year. This can go the other way around also.
What is the formula for the sum of the year digits method?
Depreciable expense = (Cost - Salvage Value) * Remaining life of asset/sum-of-the-years’-digits
Sum of the year digits = N*(N+1)/2, where the N is the estimated useful life.
This method is good for taking more depreciation in the beginning.
What is the formula for the units of production method?
This is more used to calculate the depreciation based on how much production it uses.
Cost - Salvage Value/Estimated units or hours = rate per unit or hour
Rate per unit or hour * number of units produced = depreciation expense
What is the formula for double declining balance?
Depends on percent, but here it is
200% = 2/useful life
150% = 1.5/useful life
125% = 1.25/useful life
Take this amount times NBV (Cost - AD), you ignore salvage value. While you ignore salvage value, the amount should not be depreciated below its salvage value. So to find that you take Cost-salvage value = maximum accumulated depr.
So for example, if the cost is 10,000 and the salvage value is 2,000, you depreciable base is 8,000. That is the full amount you can depreciate this asset by, you cannot exceed this amount.
What is the journal entry if the asset is impaired?
Debit: Accumulated depreciation
Debit: Loss due to impairment
Credit: Asset at full cost
What is the process for calculating depletion?
Find your depletion base: Total Cost = (Cost of land + Development costs + Restoration) - Residual value
Unit depletion = Depletion base/Estimated recoverable units
Units depletion * units extracted
Units depletion * units sold goes to COGS, what is extracted that is not sold goes to inventory.
Based on usage not on time, so dates do not matter.
What is the first step for determining if you have an impairment loss on PP&E?
You compare the NBV to future cash flows you would get from the asset, and if that amount is less than NBV you have an impairment.
This is also called the recoverability test.
When an impairment is determined, how is that calculated?
Depends on if it is held for sale or not.
If it is not, you take the FV or PV of future net cash flows - Net carrying value
If it is is, take FV or PV future net cash flows - Net carrying value = impairment loss + cost of disposal = total impariment loss
If the value of the asset goes up, you can restore the asset, only up to the total impairment loss for if it is held for sale only.
Under GAAP, if you recorded an impairment loss can you reverse the impairment loss if the assets fair value increases?
No, US GAAP does not allow the reversal of an impairment loss if it is already recorded.
The exception to this is if the asset is held for disposal. You can reverse the impairment loss, but that was covered in the first modules.
