Spice+4e+Ch11+Qex+Sol - Chapter 11 Operational Assets:...

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Question 11-1 The terms depreciation, depletion, and amortization all refer to the process of allocating the cost of an operational asset to periods of use. The only difference between the terms is that they refer to different types of operational assets; depreciation for plant and equipment, depletion for natural resources, and amortization for intangibles. Question 11-2 The term depreciation often is confused with a decline in value or worth of an asset. Depreciation is not measured as decline in value from one period to the next. Instead, it involves the distribution of the cost of an asset, less any anticipated residual value, over the asset's estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset. Question 11-3 The process of cost allocation for operational assets requires that three factors be established at the time the asset is put into use. These factors are: 1. Service (useful) life — The estimated use that the company expects to receive from the asset. 2. Allocation base — The value of the usefulness that is expected to be consumed. 3. Allocation method — The pattern in which the usefulness is expected to be consumed. Question 11-4 Physical life provides the upper bound for service life. Physical life will vary according to the purpose for which the asset is acquired and the environment in which it is operated. Service life may be less than physical life for several reasons. For example, the expected rate of technological changes may shorten service life. Management intent also may shorten the period of an asset’s usefulness below its physical life. For instance, a company may have a policy of using its delivery trucks for a three-year period before trading the trucks for new models. Question 11-5 The total amount of depreciation to be recorded during an asset’s service life is called its depreciable base. This amount is the difference between the initial value of the Chapter 11 Operational Assets: Utilization and Impairment QUESTIONS FOR REVIEW OF KEY TOPICS
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asset at its acquisition (its cost) and its residual value. Residual or salvage value is the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.
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Answers to Questions (continued) Question 11-6 Activity-based allocation methods estimate service life in terms of some measure of productivity. Periodic depreciation or depletion is then determined based on the actual productivity generated by the asset during the period. Time-based allocation methods estimate service life in years. Periodic depreciation or amortization is then determined based on the passage of time. Question 11-7
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This note was uploaded on 11/16/2009 for the course ACCOUNTING 3351 taught by Professor Malkie during the Spring '09 term at ITT Tech Flint.

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Spice+4e+Ch11+Qex+Sol - Chapter 11 Operational Assets:...

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