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Unformatted text preview: 11 DEPRECIATION AND DEPLETION CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Identify the factors involved in depreciation. 2. Explain the alternative methods of cost allocation, including activity- and time-based methods. 3. Record depreciation. 4. Explain the conceptual issues regarding depreciation methods. 5. Understand the disclosure of depreciation. 6. Understand additional depreciation methods, including group and composite methods. 7. Compute depreciation for partial periods. 8. Explain the impairment of noncurrent assets. 9. Understand depreciation for income tax purposes. 10. Explain changes and corrections of depreciation. 11. Understand and record depletion. 11-1 SYNOPSIS Terms and Factors Involved in Depreciation 1. Depreciation is the process of allocating, in a systematic and rational manner, the total cost of an asset held for more than one year as an expense to each period benefited by the asset. The total expense or depreciation base (depreciable cost ) involved is the difference between the purchase price and the estimated residual value. Depreciation is not an attempt to reflect the market value of an asset. Land, which generally has an unlimited life and a future selling price higher than its cost, is not depreciated. 2. The term depreciation describes the allocation of the cost of tangible assets, such as property, plant, and equipment. The term depletion describes the allocation of the cost of natural resource assets, such as oil, gas, minerals, and timber. The term amortization describes the allocation of the cost of intangible assets, such as patents and copyrights. "Amortization" is also sometimes used as a synonym for "depreciation" and "depletion." 3. A company considers four factors in computing a periodic depreciation charge: (a) asset cost , (b) service life , (c) residual value , and (d) method of cost allocation . 4. The cost of an asset includes all the acquisition costs a company incurs to obtain the benefits expected from the asset. These acquisition costs include the contract price, freight, assembly, installation, and testing costs. 5. Service life is a measure of the service units expected from an asset before its disposal. This measurement may be made in units of time or units of activity or output . Service life is limited by (a) physical causes, including wear and tear from use, deterioration from the passage of time, and damage and destruction, and (b) functional causes, through obsolescence and inadequacy....
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This note was uploaded on 06/11/2008 for the course ACCT 3023 taught by Professor Fasci during the Spring '08 term at The University of Texas at San Antonio- San Antonio.

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