Fall09-DepAmrtImpair

Fall09-DepAmrtImpair - Operational Assets: Depreciation,...

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Operational Assets: Depreciation, Amortization and Impairment Fixed and Intangible Assets Chapter 11 – Spiceland Text
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So, now we have these operational assets and we’re using them in our business. How do we account for them as we use them? Remember that we did not expense them, we recorded them as assets on our B/S.
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Depreciation Method of cost allocation Not related to fair market value or the “street” definition of depreciation Matching principle Journal entry: Depreciation Expense XX Accumulated Deprec XX
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What do you need to know to calculate depreciation? 1. Depreciation method Straight-line Double-declining balance Units of production 2. Depreciable base Cost – Salvage (or Residual) Value 3. Useful life # years # units
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(Cost – Salvage Value)/Useful life =Depreciation Expense Depreciation expense is the same each period Exception is for fixed assets placed into service mid-year Fixed assets are depreciated until the
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Straight-line Depreciation Assume a company acquires equipment for $10,000 on 1/1/08. It is estimated that the equipment will have a useful life of 4 years and a salvage value of $2,000 at the end of its life. What would a depreciation schedule look like? Year Calculation Depreciation Exp Net Book Value 2008 (10,000-2,000)/4 2,000 8,000 2009 (10,000-2,000)/4 2,000 6,000 2010 (10,000-2,000)/4 2,000 4,000 2011 (10,000-2,000)/4 2,000 2,000
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Determine straight-line rate (100%/useful life). Double that rate. Apply that rate to the net book value at the beginning of the period to get depreciation expense. Net book value does not take into consideration salvage value.
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Cost of machine - $60,000 Estimated useful life – 10 years Estimated salvage value - $5,000
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Straight-line rate = 100%/10 yrs = 10% DDB Rate = 10% X 2 = 20% NBV @ 1 st yr = 60,000 Depreciation Expense = 60,000 X 20% = $12,000 New NBV = 60,000 – 12,000 = $48,000
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DDB Depreciation Example Year Calculation Depreciation Exp NBV Year 0 60,000 Year 1 60,000 X 20% 12,000 48,000 Year 2 48,000 X 20% 9,600 38,400 Year 3 38,400 X 20% 7,680 30,720 Year 4 30,720 X 20% 6,144 24,576 Year 5 24,576 X 20% 4,915 19,661 Year 6 19,661 X 20% 3,932 15,729 Year 7 15,729 X 20% 3,146 12,583 Year 8 12,583 X 20% 2,517 10,066 Year 9 10,066 X 20% 2,013 8,053 Year 10 8,053 – 5,000 3,053 5,000
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Everything in depreciation (except the asset’s cost) is an estimate. What happens when one or more of those estimates change significantly? Update depreciation calculations using
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Fall09-DepAmrtImpair - Operational Assets: Depreciation,...

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