Chapter 11 Class Notes

Chapter 11 Class Notes - Chapter 11 DEPRECIATION...

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Chapter 11 DEPRECIATION, IMPAIRMENTS, & DEPLETION Depreciation – A Method of Cost Allocation Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Property, Plant, & Equipment – Depreciation Expense Natural Resources – Depletion Expense Intangible Assets – Amortization Expense (ACC 372, Chapter 12) Factors Involved in the Depreciation Process Before establishing a pattern of charges to revenue (calculating depreciation expense), a company must answer three basic questions: What depreciable base is to be used ? The base established for depreciation is a function of two factors: The original cost and salvage or disposal value. Salvage value is the estimated amount that a company will receive when it sells the asset or removes it from service. It is the amount to which a company writes down or depreciates the asset during its useful life. What is the asset’s useful life? The service life of an asset often differs from its physical life. Machinery may be physically capable of producing a product for many years beyond its service life, but if the cost of producing the product in later years is too high, then the machine is no longer used. An asset may be retired for two reasons: physical factors (such as casualty or expiration of physical life) and economic factors (obsolescence). What method of cost allocation is best? Several methods of depreciations methods may be used: 1, Activity method (units of use or production) 2. Straight-line method 3. Decreasing charge methods (accelerated): (a) Sum-of-the-years’-digits method (b) Declining balance method 1
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4. Special depreciation methods: (a) Group and composite methods (b) Hybrid or combination methods Activity Method Also called the variable charge or units of production approach, this method assumes that depreciation is a function of use or productivity, instead of the passage of time. The life of the asset is considered to be either the output it provides or the number of hours it works. The depreciation charge is calculated as follows: Depreciable Cost ÷ Units of Useful Life = Depreciation per Unit Depreciation per Unit x # of Units Consumed during the period = Depreciation Exp. The depreciation charge will vary each year depending on the extent to which the asset is used each year. Straight-Line Method This method considers depreciation to be a function of time, rather than a function of usage. This method is widely used because of its simplicity. The depreciation charge is calculated as follows: Depreciable Cost ÷ Years of Useful (Service) Life = Annual Depreciation Exp.
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This note was uploaded on 12/09/2011 for the course ACC 371 taught by Professor Proscott during the Spring '11 term at S. Alabama.

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Chapter 11 Class Notes - Chapter 11 DEPRECIATION...

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