ACCT3111-Depreciation

ACCT3111-Depreciation - Chapter 11 Depreciation and...

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Chapter 11 Depreciation and Depletion Objectives 1. Identify the factors involved in depreciation. 2. Record depreciation. 1. Different methods 2. Explain the conceptual issues regarding depreciation methods. 3. Understand the disclosure of depreciation. 4. Compute depreciation for partial periods. 3. Explain the impairment of noncurrent assets. 4. Understand and record depletion. What is the objective of accounting for depreciation? (1) Factors Involved in Depreciation Asset cost The cost of an asset includes all the acquisition costs a company incurs to obtain the benefit from the asset. Service life Service life is the measure of the number of units of service expected from the asset before its disposal. The factors that limit the service life of an asset can be divided into two general categories. Physical causes Functional causes Residual Residual, or salvage value, is the net amount that can be expected to be obtained when the asset is disposed Method of cost allocation Activity (or use) methods Time-based methods a. Straight-line b. Accelerated (declining charge) (1) Sum-of-the-years’-digits 1
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(2) Declining balance 2
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(2) Depreciation Methods (2.1) Example: Asset cost: 12,000 Date of purchase: January 1, 2006 Estimated residual life: $20,000 Estimated service life: 5 years; 10,000 hours; 20,000 units Time-Based Method: Straight Line Time-Based Method: Sum-of-the-Years’ Digits Time-Based Method: Double-Declining Balance Time-Based Method: 150%-Declining Balance Activity Method 3
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(2.2) Conceptual Evaluation of Depreciation Methods For a single asset: For a company: Selection of Method: If a company expects that repairs and maintenance costs and the total economic benefits of the asset will remain similar each period, a similar total cost each period can be achieved through straight-line depreciation and the similar repair and maintenance costs. If the company expects that benefits of having the asset will decline each year for the life of the asset, and repairs and maintenance costs are constant each period, a declining total cost will be achieved by using accelerated depreciation. (2.3) Disclosure of Depreciation APB Opinion No. 12 requires the following: Depreciation expense for the period. Balance of major classes of depreciable assets, by nature or function, at the balance sheet date. Accumulated depreciation, either by major classes of depreciable assets or in total, at the balance sheet date. A general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets. 4
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(2.4) Depreciation for Partial Periods A company purchases a $6,000 asset with a 3-year life and no residual value on August 18. The firm uses the double-declining-balance method.
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ACCT3111-Depreciation - Chapter 11 Depreciation and...

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