Lesson 12 Flashcards
What are the two special depreciation methods?
- Group and composite methods
- Hybrid or combination methods
Why would companies choose to do special depreciation methods?
The company’s assets have unique characteristics, or the nature of the industry
When would group method be used?
when the assets are similar in nature and have approximately the same useful lives.
When would composite method be used?
when assets are dissimilar and have different lives.
The computation for group or composite methods is essentially the same: find an average and depreciate on that basis. True or False?
True
Composite depreciation rate
is computed by dividing the depreciation per year by the total cost of the assets not the depreciation base.
Composite life
The length of time it takes a company to depreciate its assets on a composite basis
What are the 4 advantages of unit method (depreciation of single assets)
- it simplifies the computation mathematically
- it identifies gains and losses on disposal
- it isolates depreciation on idle equipment
- it represents the best estimate of the depreciation of each assets, not the result of averaging the cost over a longer period of time.
What are the advantages of group or composite methods?
It simplifies the bookkeeping process and tends to average out errors caused by over or under depreciation. It doesn’t distort periodic income.
If revenues generated by the asset are constant over its useful life what depreciation method should be used?
straight line
if revenues are higher (or lower) at the beginning of the asset’s life what depreciation method should be used?
decreasing (increasing) method
What is half year convention?
one half year’s depreciation both in the year of acquisition and in the year of disposal, or charge a full year in the year of acquisition and none in the year of disposal.
Companies normally compute depreciation on the basis of the nearest full month,. True or False
True
How is depreciation the same and different from other expenses?
It is the same because it reduces net income, but it differs because it does not involve a current cash outflow.
Depreicaiton does not provide __________ for the replacement of assets. Why?
Funds.
The funds for the replacement of assets come from the revenues ( generated through the use of the asset)
Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset.
What is depreciation expense for 2017? (Assume that salvage value remains unchanged.)
$17,333
An addition to an asset does not extend the useful life of the asset. It is simply added to the asset and depreciation is recalculated. For 2015 & 2016 Chattanooga depreciations $12,000 per year [($80,000 - $20,000)/5]. The depreciable basis, before the addition, on January 1, 2017 is $36,000 ($80,000 - $20,000 - $12,000 - $12,000). The addition increases the depreciable basis to $52,000 ($36,000 + $16,000). The new annual depreciation for the remaining three years is calculated as $52,000/ 3 years = $17,333.
Unless otherwise stipulated, what is depreciation normally computed on the basis of?
The nearest full month
Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation.
What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold?
$70,000
Using the straight-line method of depreciation, salvage value is used to determine the depreciable basis of the asset. In this case, monthly depreciation is calculated as: ($160,000 - $40,000) / (5 years x 12 months) = $2,000 / month. Total months of depreciation = 9 (2014) + 12 (2015) + 12 (2016) + 2 (Jan & Feb 2017) = 35.The accumulated depreciation balance when the asset is sold on March 1, 2018 is $70,000 (35 months of depreciation at $2,000 per month).
When an asset being depreciated under the group method is disposed of, how is any resulting gain or loss recorded?
Recorded in the Accumulated Depreciation account
Gains and losses are not reported during the group or composite methods. When an asset is disposed of using either the group or composite method, the gain or loss is recorded in the accumulated depreciation account.
How can the composite or group depreciation system be described?
A straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets
The group of composite methods calculate a straight-line rate that is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets.
