FAR 4 - Depreciable Assets and Depreciation

Question 1

What is component depreciation?

Answer 1

Component depreciation is the most accurate way of showing depreciation expense because each component item will be depreciated.

Question 2

What is composite depreciation?

Answer 2

The process of averaging the economic lives of a number of property units and depreciating the entire class.

** Average Life for CLASS = Total Depreciable base / Annual Depreciation.

Question 3

How do you record gain or loss if one asset in composite depreciation is sold or retired?

Answer 3

YOU DON’T RECORD GAIN OR LOSS if asset in composite depreciation is sold or retired.

You didn’t know the specific depreciation on the component in the group

Accumulated Depreciation is the PLUG

Dr: Cash
Dr: Accumulated Depreciation
Cr: Cost (Historical Cost)

Question 4

Sum of the years’ digits example

Answer 4

For 5 year life - what is depreciation for year 1 and year 2?

Year 1 = (Cost - Salvage value) x 5/15

Year 2 = (Cost - Salvage value) x 4/15

Question 5

Which methods ignore salvage value?

Answer 5

DDB ignores salvage value

Question 6

Which method uses NBV when calculating depreciation expense?

Answer 6

DDB uses NBV (Cost - Accumulated depreciation)

Sum of years uses (Cost - Salvage)

Straight line uses (Cost - Salvage)

Question 7

What do you do in DDB when asset has been depreciated less than salvage value?

Answer 7

If asset has been depreciated less than salvage value - USE STRAIGHT LINE.

Question 8

Define Units-of-Production?

Answer 8

Service potential declines with use

Question 9

How do you calculate units-of-production?

Answer 9

(Cost - Salvage Value) x (Units or hours produced / Estimated units or hours in total)

Question 10

How do you record gain or loss if one asset in INDIVIDUAL depreciation is sold?

Answer 10

Dr: Cash
Dr: Accumulated depreciation of sold asset
Cr: Historical Cost
Dr/Cr: Gain or loss

Question 11

How do you write off fully depreciated asset? Cancel everything out.

Answer 11

Dr: Accumulated Depreciation
Cr: Old Asset

Question 12

How do you record total and permanent impairment?

Answer 12

Dr: Accumulated Depreciation
Dr: Loss due to impairment
Cr: Asset at full cost

Question 13

What items do you use depletion for?

Answer 13

Natural resources - gas, timber, oil

Question 14

How to calculate depletion in income statement?

Answer 14

Step 1)

Depletion base = Cost of land + development + restoration - residual value

Unit depletion = Depletion base / estimated recoverable units

Step 2) Unit depletion x units extracted