ACCT 3110 CH 11

ACCT 3110 CH 11 - Accounting3110 Chapter11...

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Accounting 3110:   External   Financial Reporting I Chapter 11: Property, Plant, and Equipment and  Intangible Assets:  Utilization and  Impairment (Skip Appendix A and B) 
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Cost Allocation – An Overview The  matching principle   requires that part of  the acquisition cost of  operational assets be  expensed in periods  when the future  revenues are earned. Depreciation and  amortization  are cost  allocation processes  used to help meet the  matching principle  requirements.
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Some of the cost is expensed each period. Cost Allocation – An Overview Expense Acquisition Cost (Balance Sheet) (Income Statement)
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Operational Asset Debit Credit Accumulated Depreciation Property, Plant, & Equipment Depreciation Intangible Amortization Intangible Asset    Caution!   Depreciation and amortization are processes of cost allocation, not  valuation. Cost Allocation – An Overview Depreciation  on the  Balance  Sheet
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Cost allocation requires three pieces of  information for each asset: The estimated expected  use from an asset.  Total amount of cost to be allocated. Cost - Residual Value (at end of useful life) The systematic  approach used for  allocation.  Allocation  Base Service  Life Allocation  Method Measuring Cost Allocation
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Time-based Methods Straight-line (SL) Accelerated Methods Sum-of-the-years’ digits (SYD) Declining Balance (DB) Activity-based methods Units-of-production method (U of  P). Group and composite  methods Tax depreciation Depreciation of Operational Assets
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Straight-Line The most widely  used and most easily  understood method. Results in the same  amount of depreciation in  each year of the asset’s  service life. On January 1, we purchase equipment for $50,000 cash.   The equipment has an estimated service life of 5 years  and estimated residual value of $5,000.  What is the annual straight-line depreciation?
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Straight-Line Accumulated Accumulated Undepreciated Depreciation Depreciation Depreciation Balance Year (debit) (credit) Balance (book value) 50,000 $ 1 9,000 $ 9,000 $ 9,000 $ 41,000 2 9,000 9,000 18,000 32,000 3 9,000 9,000 27,000 23,000 4 9,000 9,000 36,000 14,000 5 9,000 9,000 45,000 5,000 45,000 $ 45,000 $ Residual Value BV = Residual Value at the  end of the asset’s useful life.
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Accelerated Methods Note that total depreciation over the asset’s useful life is the same as the Straight-line Method. Accelerated methods result in more depreciation in the early years of an asset’s useful life and less depreciation in later years of an asset’s useful life.
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This note was uploaded on 06/05/2011 for the course ACCT 3110 taught by Professor Snow during the Spring '11 term at Toledo.

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ACCT 3110 CH 11 - Accounting3110 Chapter11...

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