ch11 - Chapter 11 Depreciation Impairments and Depletion...

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  Chapter 11 1 Chapter 11: Depreciation, Impairments,     and Depletion AIM 3331-0U1 Summer 2009 Xinyi Lu
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  Chapter 11 2 Objective 1. Explain the concept of depreciation. 2. Identify the factors involved in the depreciation process. 3. Compare activity, straight-line, and decreasing-charge  methods of depreciation. 4. Explain special depreciation methods. 5. Explain the accounting issues related to asset  impairment. 6. Explain the accounting procedures for depletion of  natural resources. 7. Explain how to report and analyze property, plant,  equipment, and natural resources . .
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  Chapter 11 3 Depreciation -Method of Cost Allocation 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. Justification for Depreciation: It matches costs with revenues (the  matching principle). Fluctuation in market values is difficult to be  determined.
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  Chapter 11 4 Allocating Costs of Long-Term  Assets Fixed assets               Depreciation expense Intangibles                 Amortization expense Natural resources        Depletion expense
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  Chapter 11 5 Factors Involved in the  Depreciation Process Three basic questions: 1. What  depreciable base  is to be used? 2. What is the asset’s  useful life ? 3. What  method  of cost allocation is best?
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  Chapter 11 6 Depreciable Base for the Asset Two factors affect depreciable base of the  asset: 1. Original cost : historical cost. 2. Salvage value : the estimated amount that  will be receive when the asset is sold or  removed from service.  Depreciation base=Original cost- Salvage value
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  Chapter 11 7 Estimation of Service Lives Service life  ( useful life ): the number of years that  assets is capable of economically providing the  service it was purchased to perform. The estimate of an asset’s service life depends on  both the  economic factors  and the  physical factors   related to its use. Economic factors are characterized by  inadequacy, supersession and obsolescence. Physical factors related to wear and tear, decay,  and casualties that prevent the asset from  performance indefinitely.
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  Chapter 11 8 Methods of Depreciation Major depreciation methods: 1. Activity method (units of use or production). 2. Straight-line method.  3. Sum-of-the-years’-digits. 4. Declining-balance method.
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