SSNT11_Oper_Assets - Operational Assets: Utilization and...

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Operational Assets: Utilization and Impairment
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Class Evaluations
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Cost Allocation – An Overview Some of the cost is expensed each period. Expense Acquisition Cost (Balance Sheet) (Income Statement) The matching principle requires that part of the acquisition cost of operational assets be expensed in periods when the future revenues are earned. Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements.
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Cost Allocation – An Overview Operational Asset Debit Intangible Amortization Intangible Asset Account Credited Accumulated Depreciation Property, Plant, & Equipment Depreciation Natural Resource Depletion Natural Resource Asset Caution! Depreciation, depletion, and amortization are processes of cost allocation, not valuation! Depreciation on the Balance Sheet Property, plant, and equipment: Land and buildings 150,000 $ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000 $ Less Accumulated depreciation (122,000) Net property, plant and equipment 453,000 $
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Measuring Cost Allocation 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
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Depreciation of Operational Assets Time-based Methods Straight-line (SL) Accelerated Methods Sum-of-the-years’ digits (SYD) Declining Balance (DB) Activity-based methods Units-of-production method (UOP). Group and composite methods Tax depreciation
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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 Annual $ 50,000 – $ 5,000 Depreciation = 9,000 $ = Straight-line 5 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. SYD depreciation is computed as follows: = SYD Depreciation Residual Value Cost ( Remaining Years of Useful Life Sum-of-the-Years Digits* × )
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Sum-of-the-Years’ Digits (SYD) Sum-of- the- Years'- Digits = ( Useful Life × [ Useful Life + 1 ] ) (SYD) 2 SYD = ( 5 × [ 5 + 1] ) 2 = 30 ÷ 2 = 15 ÷ On January 1, we purchase equipment for $50,000 cash.
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SSNT11_Oper_Assets - Operational Assets: Utilization and...

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