Chap011a1 - CHAPTER 11 Property Plant and Equipment and...

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11 - 1 CHAPTER 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment
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11 - 2 Some of the cost is expensed each period. Some of the cost is expensed each period. Cost Allocation – An Overview Expense Expense Acquisition Cost Acquisition Cost (Balance Sheet) (Income Statement) The matching principle requires that part of the acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the future revenues are earned. The matching principle requires that part of the acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the future revenues are earned. Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements. Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements.
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11 - 3 Asset Category Debit Intangible Amortization Intangible Asset Account Credited Accumulated Depreciation Property, Plant, & Equipment Depreciation Natural Resource Depletion Natural Resource Asset Caution! Depreciation, depletion, and amortization are processes of cost allocation, not valuation! Depreciation on the Balance Sheet Cost Allocation – An Overview
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11 - 4 Cost allocation requires three pieces of information for each asset: The estimated expected The estimated expected use from an asset. use from an asset. The estimated expected The estimated expected use from an asset. use from an asset. Total amount of cost to be allocated. Cost - Residual Value (at end of useful life) Total amount of cost to be allocated. Cost - Residual Value (at end of useful life) The systematic approach used for allocation. The systematic approach used for allocation. Allocation Base Allocation Base Service Life Service Life Allocation Method Allocation Method Measuring Cost Allocation
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11 - 5 Time-based Methods Straight-line (SL) Accelerated Methods Sum-of-the-years’ digits (SYD) Declining Balance (DB) Time-based Methods Straight-line (SL) Accelerated Methods Sum-of-the-years’ digits (SYD) Declining Balance (DB) Activity-based methods Units-of-production method (UOP). Activity-based methods Units-of-production method (UOP). Group and composite methods Group and composite methods Depreciation
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11 - 6 Straight-Line The most widely The most widely used and most used and most easily understood easily understood method. method. The most widely The most widely used and most used and most easily understood easily understood method. method. Results in the same Results in the same amount of depreciation in amount of depreciation in each year of the asset’s each year of the asset’s service life. service life. Results in the same Results in the same amount of depreciation in amount of depreciation in each year of the asset’s each year of the asset’s service life.
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