ACT3391Fall2009handoutCH11

ACT3391Fall2009handoutCH11 - Notes related to Chapter 11...

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Notes related to Chapter 11 DEPRECIATION IS A MEANS OF COST ALLOCATION – IT DOES NOT REFLECT A DECLINE IN THE VALUE OF A FIXED ASSET! Depreciation – the cost allocation process for tangible fixed assets like machinery and buildings. Depletion – the cost allocation process for natural resources such as timber, coal, or oil. Amortization – the cost allocation process for certain intangible assets. The depreciation process: What is the depreciable base? Cost minus salvage value. Note that from a practical point of view, companies often assign a salvage value of zero to its fixed assets. What useful life to use? Judgment What depreciation method to use? Note that for financial reporting purposes, straight-line is the method most widely used. o Activity method – such as a units-of-production method assumes that depreciation is a function of use as opposed to the passage of time; salvage value is considered. o Straight-line – salvage value is considered o Accelerated methods – higher amounts of depreciation expense in the early years and lower amounts in the later years Sum-of-the-years’-digits – salvage value is considered; note the formula on the bottom of page 544 Declining-balance – salvage value is NOT considered; watch out for final year so that the fixed asset’s book value is not less than the original salvage value estimate
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This note was uploaded on 03/31/2011 for the course ACCT 3391 taught by Professor Turpin during the Spring '10 term at Troy.

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ACT3391Fall2009handoutCH11 - Notes related to Chapter 11...

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