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302Chapter 13 notes

# 302Chapter 13 notes - CHAPTER 13 I Investments in...

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C HAPTER 13 I Investments in Noncurrent Operating Assets—Utilization and Retirement I L EARNING O BJECTIVES 1. Use straight-line, accelerated, use-factor, and group depreciation methods to compute annual depreciation expense. C Four factors are considered in computing annual depreciation— asset cost, residual value, useful life, and pattern of use. C The most common methods for computing annual depreciation: < Time-factor methods. < Straight-line depreciation—the difference between asset cost and residual value is divided by the useful life of the asset. < Accelerated methods. < Sum-of-the-years’-digits depreciation—the depreciable asset cost is multiplied by a fraction; the numerator is the number of years remaining in the asset life as of the beginning of the year, and the denominator is the sum of all of the digits from 1 to the original useful life. < Declining-balance depreciation—the asset book value is multiplied by a constant percentage rate derived from the useful life. The most commonly used percentage is double the straight-line rate. < Use-factor methods. < Service-hours depreciation—depreciable cost is divided by total expected lifetime service hours to compute a per-hour depreciation rate. The number of service hours in a period multiplied by the rate yields the periodic depreciation charge. < Productive-output depreciation—similar to service-hours depreciation, except the rate is based on expected number of output units during the life of the asset. < Group and composite methods. < A collection of assets is depreciated as one group. < Group cost allocation procedures are referred to as group depreciation when the assets in a group are similar and composite depreciation when the assets in the group are related but dissimilar. 1

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< A group rate, derived from an initial analysis of the type of assets in the group, is multiplied by the total cost of group assets to compute periodic depreciation expense. < Gains and losses resulting from normal variations in asset lives are not recognized. 2. Discuss the issues impacting proper amortization of intangible assets. C Intangible assets are to be amortized over their expected economic lives, not to exceed 40 years. C The straight-line method is used unless there is strong justification for using another method. 3. Apply the productive-output method to the depletion of natural resources. C The depletion rate is based on total development cost of the natural resource divided by the estimated amount of resource units to be removed. C Periodic depletion expense is the depletion rate multiplied by the number of units removed during the period. C Structures and improvements related specifically to removal of the natural resource should be depreciated based on the fraction of natural resources extracted during the period.
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302Chapter 13 notes - CHAPTER 13 I Investments in...

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