Intermediate Accounting

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11 Investments in Noncurrent Operating Assets—Utilization and Retirement Overview Asset utilization really means the expensing of an asset over its useful life. For tangible, fixed assets, this is called depreciation. For most intangible assets, the same thing as depreciation happens, but it is referred to as amortization. Finally, for natural resources, the same process is called depletion. Assets can also become impaired, which means that they are expensed faster than their previous useful life would have indicated because of some change of events. The calculation and process by which impairment is indicated varies depending on the type of asset. Assets can also be disposed of, sold, or exchanged. When this happens, the company removes the asset from the book (along with any contra account like Accumulated Depreciation if such an account exists) and records a gain or loss for the difference between the book value and the amount received (if any). Companies generally keep multiple sets of fixed asset records. This is because the assets frequently have different useful lives, or methods by which they are depreciated, for financial accounting and income tax accounting purposes. One common convention that is usually different for book and income tax purposes is when to begin and finish depreciation. For financial accounting (book) purposes, most companies use a monthly convention. For income tax purposes, most assets must be depreciated using a half- year convention, which means that the asset is depreciated for half a year in the year in which it is purchased and disposed regardless of the actual date. Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered.
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11-2 Chapter 11 If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook. Tips, Hints, and Things to Remember LO1 – Use straight-line, accelerated, use-factor, and group depreciation methods to compute annual depreciation expense. How? Students don’t usually have a problem with straight-line depreciation. It is the method they are most familiar with, and it is the easiest to calculate anyway. Since very few companies use the sum-of-the-years’-digits method, professors may not bother testing you on it. Ask your professor before completely skipping the sum-of-the-years’- digits method. The main thing with the sum-of-the-years’-digits method is to realize that
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This note was uploaded on 12/22/2010 for the course ACCOUNTING 564 taught by Professor Ahmadali. during the Fall '08 term at American Dubai.

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032459237X_174369 - 11 Investments in Noncurrent Operating...

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