FIN ch11 - Chapter 11 OPERATIONAL ASSETS: UTILIZATION AND...

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OPERATIONAL ASSETS: OPERATIONAL ASSETS: UTILIZATION AND IMPAIRMENT UTILIZATION AND IMPAIRMENT Chapter 11
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Slide 2 Acquisition and Disposition of Operational Assets Acquisition and Disposition of Operational Assets Acquisition Acquisition Classification Classification Cost Principle Cost Principle PPE PPE Natural Resources Natural Resources Intangibles Intangibles Lump-sum purchases Lump-sum purchases Noncash Acquisitions Noncash Acquisitions Deferred Payments Deferred Payments Stock Issuances Stock Issuances Donations Donations Self-constructed assets Self-constructed assets Dispositions Dispositions Sale Involuntary Involuntary conversion conversion Exchanges Utilization Utilization Depreciation Depreciation Change in estimate Change in Change in principle principle Impairment Impairment Maintenance Maintenance Betterment Betterment Errors Errors
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Slide 3 11-3 Some of the cost is expensed each period. Depreciation – An Overview Depreciation – An Overview Expense Acquisition Cost (Balance Sheet) (Income Statement) The matching principle requires that part of the acquisition cost of operational assets be expensed in periods when the future revenues are earned. Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements.
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Slide 4 11-4 Operational Asset Debit Intangible Amortization Intangible Asset Account Credited Accumulated Depreciation Property, Plant, & Equipment Depreciation Natural Resource Depletion Natural Resource Caution! Depreciation, depletion, and amortization are processes of cost allocation, not valuation! Depreciation – An Overview Depreciation – An Overview Depreciation on the Balance Sheet
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Slide 5 11-5 Depreciation requires three pieces of information for each asset: The estimated expected use from an asset. Total amount of cost to be allocated. Cost - Residual Value (at end of useful life) The systematic approach used for allocation. Allocation Base Service Life Allocation Method Measuring Depreciation Measuring Depreciation
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Slide 6 11-6 Time-based Methods Straight-line (SL) Accelerated Methods Sum-of-the-years’ digits (SYD) Declining Balance (DB) Activity-based methods Units-of-production method (UOP). Group and composite methods Tax depreciation Depreciation of Operational Assets Depreciation of Operational Assets
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Slide 7 11-7 Straight-Line Straight-Line The most widely used and most easily understood method. Results in the same amount of depreciation in each year of the asset’s service life. On January 1, we purchase equipment for $50,000 cash. The equipment has an estimated service life of 5 years and estimated residual value of $5,000. What is the annual straight-line depreciation?
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Slide 8 11-8 Straight-Line Straight-Line Accumulated Accumulated Undepreciated Depreciation Depreciation Depreciation Balance Year (debit) (credit) Balance (book value) 50,000 $ 1 9,000 $ 9,000 $ 9,000 $ 41,000 2 9,000 9,000 18,000 32,000 3 9,000 9,000 27,000 23,000 4 9,000 9,000 36,000 14,000 5 9,000 9,000 45,000 5,000 45,000 $ 45,000 $ Residual Value BV = Residual Value at the end of the asset’s useful life.
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Slide 9 11-9
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This note was uploaded on 04/08/2009 for the course ACG 3482C taught by Professor Tinaker during the Spring '09 term at University of Florida.

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FIN ch11 - Chapter 11 OPERATIONAL ASSETS: UTILIZATION AND...

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