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CHAPTER 11 REVIEW - CHAPTER11REVIEW 1 naturalresources. .D

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CHAPTER 11 REVIEW 1. Chapter 11 presents a discussion of the factors involved in the accounting and recording of depreciation and depletion and the methods of writing off the cost of tangible assets and natural resources. Depreciation refers to a cost allocation of tangible plant assets. Depletion is the term used to describe the cost allocation related to natural resources such as timber, oil, or coal. Amortization is the term used to describe the expiration of intangible assets. In addition to a thorough discussion of the accounting problems involved, the chapter presents a detailed analysis and explanation of the various depreciation and write off methods used in practice. Depreciation Process 2. (S.O. 1) Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. The cost allocation approach is justified because it matches costs with revenues and because fluctuation in market values is difficult to determine. 3. (S.O. 2) To compute depreciation, an accountant must establish (a) the depreciable base to be used for the asset, (b) the asset’s useful life, and (c) the depreciation method to be used. Determination of the first two factors requires the use of estimates. 4. The depreciable base is the difference between an asset’s cost and its salvage value. Salvage value is the estimated amount that will be received at the time the asset is sold or removed from service. *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. 5. The useful life (service life) of a plant asset refers to the number of years that asset is capable of economically providing the service it was purchased to perform. The service life of an asset should not be confused with its physical life. For example, a machine may no longer provide a useful service to an organization even though it remains physically functional. Thus, the estimate of an asset’s service life is dependent upon both the economic factors and the physical factors related to its use. Economic factors are characterized by inadequacy, supersession, and obsolescence. Physical factors relate to wear and tear, decay, and casualties that prevent the asset from performing indefinitely. Depreciation Methods
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6. The depreciation method selected for a particular asset should be systematic and rational. Depreciation methods may be classified as: A. Activity method. B. Straight-line method. C. Decreasing charge methods. a. Sum-of-the-years’-digits. b. Declining-balance method. D. Special depreciation methods. a. Group and composite methods. b. Hybrid or combination methods. 7. The following information for a piece of machinery will be used to illustrate some of the depreciation methods discussed in the following paragraphs.
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