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Chapter 9 - Solution Manual

This concept is based upon the cost realization and

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This concept is based upon the cost, realization and matching concept of conventional financial accounting. Cost represents the amount that is recorded as the value of the asset to the entity at the date of acquisition. In subsequent periods cost less accumulated depreciation is considered to represent the minimum value to the entity of the services to be received from the plant asset 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
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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
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This concept is based upon the cost realization and...

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