Summary-Ch.11 - Summary: Chapter 11 Main issues Understand...

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Summary: Chapter 11 Main issues Understand depreciation and depletion accounting procedures: Depreciation is the process of allocating the cost of tangible assets to expense in a rational and systematic manner over the periods of use. It is not a process of valuation. Accounting for impairment of fixed assets 1. Factors to be considered in the depreciation process: Depreciation base. This is equal to the original cost minus the expected salvage value. Estimated service life. Describe the difference between the physical life of an asset and its service life. a. An asset’s physical life is limited by physical factors such as wear and tear. These factors set the outside limit for an asset’s useful life. b. An asset’s service life is limited by economic factors such as inadequacy, supersession, and obsolescence. 2. Methods of Depreciation. Describe the characteristics of these methods and the factors that influence the choice of method, as described below. Activity Methods: Assumes that depreciation is a function of use. The life of the asset is considered in terms of either the output it provides or the number of units of activity it works. An estimate of units of output or service units is often difficult to measure. This method is not appropriate in situations where depreciation is a function of time instead of activity. Straight-line Method: This method is widely used because of its simplicity in charging a constant amount each period. This method assumes that the asset’s economic usefulness is the same each year and that repair and maintenance expenses are essentially the same each year. Decreasing Charge (Accelerated Depreciation) Methods: Justified on the grounds that since the asset is more efficient in the earlier years more depreciation should be charged in those years. a.
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This note was uploaded on 07/11/2010 for the course ACC 5110 taught by Professor Lee during the Winter '10 term at Wayne State University.

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Summary-Ch.11 - Summary: Chapter 11 Main issues Understand...

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