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320 Lesson 10b - Week11 Depreciationand Impairment 1...

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Week11 Depreciation and  Impairment 1
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Depreciation Rational and systematic process used to allocate the cost of a capital asset or intangible over its useful life Not an attempt at valuation Allocation method should attempt to mirror the revenue stream produced by the use of the asset Land, intangibles with an indefinite life and goodwill are NOT depreciated Need to estimate useful life residual value Need to depreciate each part of a PP&E that is significant in relation to the total cost of the item 2
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Factors affecting choice of allocation method Matching to revenues Corporate reporting objectives Industry norms Parent company preferences Simplified reporting Accounting information system 3
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Useful life Consider: Residual value amount it would receive currently for the asset if it were already the age and condition expected at the end of its useful life includes estimated costs of disposal dismantling, disposing 4
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Depreciation methods Straight-line most commonly used method Cost - residual value Useful life assumes steady revenue stream; repairs and maintenance constant over its lifetime 5
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Service hours Assumes actual use of asset is effective match with revenue; also repairs and maintenance will likely be contingent on the use of the asset Cost - residual value Estimated service life in hours Each period determine number of hours used Cost per hour × number of hours used = Depreciation for period = Cost per hour 6
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Productive output Assumes output produced is a good match to revenue generated; also maintenance will be affected by output produced Cost - residual value Estimated total productive output Each period: determine number of units produced Cost per unit of output × number of units produced = Depreciation for the period = Cost per unit of output Do E11-11 7
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Liquidating dividend as natural resource declines, company is slowly shutting down issue dividends that flows the assets of the company back to shareholders dividend > earnings return dividend equal to depletion amount Retained earnings Common shares Cash 8
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Declining balance method Assumes asset is most efficient in early years; in later years repairs and maintenance will increase as asset ages Uses twice the straight-line rate: 1 Useful life (Cost - accumulated depreciation) × DB rate = Depreciation expense As you depreciation the asset, you will NOT depreciate the asset below its residual value × 2 = Declining balance rate 9
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