Section 2 - Depreciation under GAAP Flashcards
What is a fixed asset?
An asset that has a useful life of more than one year or accounting period.
Under the straight-line method, an asset is depreciated by
Under the straight-line method, an asset is depreciated by finding the depreciation expense or annual depreciation rate.
Depreciable Base** = Annual depreciation expense
Estimated Useful life in Years
OR
1.00 = Annual depreciation rate** (Rate x Depreciable Base)
Estimated Useful life in Years
The declining balance is multiple of the straight line rate. The most commonly used percentages are:
The declining balance method can be used as either 125%, 150% or 200% or the straight-line depreciation rate.
The 200% rate, also referred to as the “double declining balance” is used most often.
Which of the four is not one of the depreciation methods?
- Straight-line
- Residual Value
- Declining Balance
- Sum of the year’s digit
Residual value
Residual value is an estimated dollar value determined by management. It represents the amount they expect to recover for an asset at the end of its useful life
Under GAAP rules, depreciation cannot begin until
Under GAAP, depreciation cannot begin until the asset has been acquired and placed in service.
When using the straight-line method, an even amount of depreciation expense is taken each year of the assets useful life.
True or False
True.
Under the straight-line method of depreciation, an even amount of depreciation is recognized each year.
The balance in the Accumulated Depreciation account represents:
Total depreciation expense recognized since the asset was placed in service.
The depreciation rate is multiplied by the book value under which depreciation method?
Declining balance method of depreciation
What happens to the book value of an asset when depreciation is recognized?
Anytime depreciation is recorded, the Accumulated Depreciation account increases and the associated asset’s book value decreases.
Paved parking areas, driveways, fences, and outdoor lighting are examples of land improvements.
True or False
True
Under the Units of Production method, assets are depreciated each year based on:
The numbers of units produced, such as total hours used, total miles driven, total copies made or some other measure of production.
Under the units of production method, the depreciation is subject to fluctuation as an asset is depreciated each year according to the unit of measure (hours, miles, copies)
Elijah CO purchased equipment that incurred the following breakdown of costs:
- Invoice price : $21,000
- Sales Tax: 600
- Freight in: 420
- Installation: 155
Thus when the purchase of equipment is recorded in the books, the journal entry is as follows:
Equipment (DR.) $22,175 (increase to Equipment account balance)
Cash (CR.) $22,175 (decrease to Cash account balance)
The Depreciation Expense account appears on which Financial Statement?
Income Statement
The balance in the Depreciation Expense account represents:
Total cost of the asset expensed against revenue for the current period.
(The portion of the asset that has been expensed recognizes the portion of the asset that has lost value)
What are land improvements?
land improvements are enhancements to a plot of land to make it more usable and are recorded separately from land because they have a limited life; therefore they are depreciated.
The portion of an asset used for manufacturing purposes is depreciated and recorded in which account
Inventory - Work in Process Overhead
The general entry to record Depreciation Expense is:
Depreciation Expense (DR.) (increase to Expense account balance)
Accumulated Depreciation (CR.) (increase to Accum Dep. account balance)
Please note, since Accumulated Depreciation is an example of a contra-asset account, an increase to this account represents a decrease to the associated asset account.
How should a company depreciate assets that were acquired in a group purchase?
Sometimes when companies make purchases, they pay a single price for a group of assets, and since the invoice isn’t itemized, the company is not able to differentiate how much of the cost, freight, installation, and other costs are attributable to each asset. Due to the fact that one asset may have a life of three years, another five years and some of the assets in the group may not be depreciable at all; the company must allocate a separate cost for each asset.
The price of each asset is a group purchase is computed as follows:
Step 1: Specific asset fair market value (FMV) = Rate
Total FMV of all assets acquired
Step 2: Rate x total acquisition cost = specific asset acquisition cost
The portion of the asset used up, worn out each year is recognized as ________.
Depreciation expense.
How is the useful life determined?
The useful life is an estimated number of years the company expects the asset to last or the amount of production it expects from the asset measured in hours, miles, units produced or any other measurable standard.
Under GAAP depreciation rules, the useful life is determined based on an estimate made by management as compared to the IRS rules which uses tables with a specific recovery period (useful life) for different classes of assets.
