Fixed & Intangible Assets

Question 1

How is activity method of depreciation calculated?

Answer 1

Depreciation Charge = [(Cost - Salvage Value) * Hours this year ] / Total lifetime estimated hours

Question 2

How is straight line method of depreciation calculated?

Answer 2

Depreciation expense = (Cost - Salvage Value) / Estimated Service life of asset

Question 3

How is sum-of-the-years’-digits method calculated?

Answer 3

1. This method takes the asset’s expected life and adds together the digits for each year; so if the asset was expected to last for five years, the sum of the years’ digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15.
2. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year 1.

3. Year 1: 5/15 = 33%
    Year 2: 4/15 = 27%
    Year 3: 3/15 = 20%
    Year 4: 2/15 = 13%
    Year 5: 1/15 = 7%

Question 4

How is Declining Balance Method calculated?

Answer 4

(Book Value - Salvage Value) * Rate of depreciation %

Question 5

How is Double Declining Balance of Depreciation calculated?

Answer 5

[(Cost-Accumulated Depreciation) / Useful Life of Asset] * 2

Question 6

What is Accumulated Depreciation?

Answer 6

The total depreciation of an asset reported on the balance sheet

Question 7

What is Depreciation Expense?

Answer 7

Expense for the period showed on the income statement

Question 8

How are assets written off?

Answer 8

1. Reduction in book value of asset when it becomes clear that the actual value of asset is less than book value
2. Loss on write down debited for the difference between assets book value and actual value
3. The loss is then carried through the income statement, lowering net income for that period.

Question 9

How are Intangible Assets valued?

Answer 9

1. Intangible assets having determinable useful life are valued at fair value.
2. The fair value can be the sale price or by the discounted estimate of their financial benefit.
3. Some intangible assets have a determinable useful life, like patents, which have a legally defined life, or mailing lists, which management believes will only be useful for a few years. They are amortized over their remaining years, typically by the straight line method.

Question 10

What are Intangibles with long life?

Answer 10

Intangibles with an indeterminate useful life which don’t expire for a very long time, include copyright, which is the right for a person or group to own the exclusive rights over their original work; trademarks;

Question 11

Depletion of natural resource calculation

Answer 11

1. Divide the amount paid for the land by the estimated units of measure of the natural resource (tonnes of mineral removed)
2. The result of that computation will give you the price for each unit of measure (the price per ton)
3. Multiply the number of units of measure extracted by the cost for each unit

Question 12

What is goodwill?

Answer 12

Goodwill, which is when a company pays more that the book value of the net assets for another company.

They aren’t amortized but must be examined yearly for impairment, which occurs when the fair value of the intangible has fallen below the asset’s value on the books. Impaired intangibles must be written down by the appropriate amount.