Chapter 9 - Solution Manual

The realization concept requires that during the life

Info icon This preview shows pages 4–6. Sign up to view the full content.

View Full Document Right Arrow Icon
during the remainder of its life. The realization concept requires that during the life of an asset its valuation should not be greater than cost or cost less accumulated depreciation; if a higher valuation were recorded, the entity would recognize unrealized income. ii. The matching concept requires that the portion of the cost (or value basis) of the asset to be allocated to each accounting period should be matched with the expected revenue or net revenue contribution of the period. Matching can take the form of (1) adjusting depreciation charges for the effects of interest during the entire life of the asset, (2) associating depreciation allocations with net revenue contributions of the asset so that they are proportional to the net revenue contributions of each period, (3) associating depreciation allocations with nonmonetary, physical service units (e.g., input or output measures, such as machine-hours or miles of operation or number of units produced) so that they are proportional to the units of service provided each period or (4) associating depreciation allocations with units of time (e.g., months or years) so that they are equal for periods of equal length. iii. Since this concept merely requires that the allocation be systematic and rational, much discretion is left to management in the selection of a depreciation method. But the requirement that the allocation be rational probably means that it should be related to the expected benefits to be received from the asset. c. Since the conventional accounting concept of depreciation is a process of cost allocation, not valuation, the concern here is with determining what portion of the cost of the computer system should be assigned to expense in a given accounting period. The estimate of periodic depreciation is dependent upon three separate variables: i. Establishing the depreciation base. Since an asset may be sold before its service value is completely consumed, the depreciation base is the cost of asset services that will be used by the
Image of page 4

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
171 firm and charged to expense during its service life; this usually is less than the original cost of the asset. The depreciation base of an asset is its acquisition cost plus removal costs at time of retirement and minus gross salvage value. ii. Estimating the service life. This involves selecting the unit in which the service life of the asset is to be measured and then estimating the total number of units of service embodied in the asset. Although service life usually is measured in units of time, it may be more appropriate to use units of output or activity which usually are expressed in physical units such as tons, gallons, miles or machine-hours. In selecting the appropriate unit of service for each asset, consideration should be given to the factors that decrease the service life of an asset. These factors may be divided into two classes: (1) physical causes including casualties and (2) economic and functional causes.
Image of page 5
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern