Chapter 11 lecture notes

Chapter 11 lecture notes - 11-1CHAPTER 11Depreciation and

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Unformatted text preview: 11-1CHAPTER 11Depreciation and Depletion11-2LECTURE OUTLINEChapter 11 can be covered in two class sessions. Most students are alreadyfamiliar with the three primary chapter topics: depreciation accounting, income taxdepreciation and depletion accounting.A. Depreciation, Depletion, and Amortization: Procedures to indicate that the servicepotential of an asset has declined. Depreciation and depletion are discussed in thischapter. Amortization is discussed in Chapter 12.1.Depreciation is a decline in service potential due to physical and economicfactors.2.Depreciation accounting is the process of allocating the cost of tangible assetsto expense in a rational and systematic manner over the periods of use. It isnot a process of valuation.3.Factors to be considered in the depreciation process:a.Depreciation base. This is equal to the original cost minus the expectedsalvage value.b.Estimated service life. Describe the difference between the physical life ofan asset and its service life.(1)An asset’s physical life is limited by physical factors such as wear andtear. These factors set the outside limit for an asset’s useful life.(2)An asset’s service life is limited by economic factors such asinadequacy, supersession, and obsolescence.B. Methods of Depreciation. Describe the characteristics of these methods and thefactors that influence the choice of method, as described below.11-31.Activity Methods:Assumes that depreciation is a function of use. The life ofthe asset is considered in terms of either the output it provides or the number ofunits of activity it works. An estimate of units of output or service units is oftendifficult to measure. This method is not appropriate in situations wheredepreciation is a function of time instead of activity.2.Straight-line Method:This method is widely used because of its simplicity incharging a constant amount each period. This method assumes that theasset’s economic usefulness is the same each year and that repair andmaintenance expenses are essentially the same each year.3.Decreasing Charge (Accelerated Depreciation) Methods:Justified on thegrounds that since the asset is more efficient in the earlier years moredepreciation should be charged in those years.a.Sum-of-the-Years’-Digits Method.This method requires multiplication ofthe asset’s depreciable cost by a fraction that decreases each year of theasset’s service life. Each fraction uses the sum of the years’ digits as adenominator and number of years estimated life at the beginning of theyear as a numerator.b.Declining Balance Methods.The declining balance rateremainsconstant and is applied to the remaining book value, which declines eachyear. Salvage value is ignored in computing periodic depreciation....
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This note was uploaded on 02/28/2012 for the course ACCOUNTING 401 taught by Professor Johnson during the Spring '12 term at Regis University.

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Chapter 11 lecture notes - 11-1CHAPTER 11Depreciation and

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