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Unformatted text preview: 11-111DEPRECIATION AND DEPLETION CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Identify the factors involved in depreciation. 2. Explain the alternative methods of cost allocation, including activity- and time-based methods. 3. Record depreciation. 4. Explain the conceptual issues regarding depreciation methods. 5. Understand the disclosure of depreciation. 6. Understand additional depreciation methods, including group and composite methods. 7. Compute depreciation for partial periods. 8. Explain the impairment of noncurrent assets. 9. Understand depreciation for income tax purposes. 10. Explain changes and corrections of depreciation. 11. Understand and record depletion. 11-2SYNOPSISTerms and Factors Involved in Depreciation1. Depreciationis the process of allocating, in a systematic and rational manner, the total cost of an asset held for more than one year as an expense to each period benefited by the asset. The total expense or depreciation base(depreciable cost) involved is the difference between the purchase price and the estimated residual value. Depreciation is notan attempt to reflect the market value of an asset. Land, which generally has an unlimited life and a future selling price higher than its cost, is not depreciated. 2. The term depreciationdescribes the allocation of the cost of tangibleassets, such as property, plant, and equipment. The term depletiondescribes the allocation of the cost of natural resourceassets, such as oil, gas, minerals, and timber. The term amortizationdescribes the allocation of the cost of intangibleassets, such as patents and copyrights. "Amortization" is also sometimes used as a synonym for "depreciation" and "depletion." 3. A company considers four factors in computing a periodic depreciation charge: (a) asset cost, (b) service life, (c) residual value, and (d) method of cost allocation. 4. The costof an asset includes all the acquisition costs a company incurs to obtain the benefits expected from the asset. These acquisition costs include the contract price, freight, assembly, installation, and testing costs. 5. Service lifeis a measure of the service units expected from an asset before its disposal. This measurement may be made in units of timeor units of activity or output. Service life is limited by (a) physical causes, including wear and tear from use, deterioration from the passage of time, and damage and destruction, and (b) functional causes, through obsolescence and inadequacy. 6. The residual value(salvage value) of an asset is the net amount that a company expects to obtain from disposing of the asset at the end of its service life. Because the residual value is difficult to estimate, it is often ignored or recorded at a standard percentage of cost. Such treatments of the residual value are acceptable unless the effects are material. Sometimes a company expects an obligation related to the retirement of an asset at the end of its life....
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- Spring '11