Accounting Chapter 11

Front 1

Explain the concept of depreciation

Back 1

Depreciation allocates the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Front 2

Identify the factors involved in the depreciation process.

Back 2

The factors involved are 1. determining the depreciation base for the asset. 2. Estimating the service lives. 3. Selecting a method of depreciation.

Front 3

Cpmpare activity, straight line, and decreasing charge methods of depr

Back 3

1. Activity: Assumes that depreciation is a function of use or productivity instead of the passage of time. The life of the asset is considered in terms of either the output it proveids, or an input measure such as the number of hours it works.
2. Stright line method: considers depreciation a function of time instead of a functiuonof usage. The straight line procedure is often the most conceptually appropriate when the decline in usefulness is constant from period to period.
3. Decreasing charge methods: Provides for a higher depreciation cost in the earlier years and lower charges in later periods. The main justification for this approach is that the asset is the most productive in its early years.

Front 4

Straight line method

Back 4

Stright line method: considers depreciation a function of time instead of a function of usage. The straight line procedure is often the most conceptually appropriate when the decline in usefulness is constant from period to period.

Front 5

Decreasing-charges method.

Back 5

Decreasing charge methods: Provides for a higher depreciation cost in the earlier years and lower charges in later periods. The main justification for this approach is that the asset is the most productive in its early years.

Front 6

Explain the accounting issues related to asset impairment

Back 6

The process to determine an impairment loss is as follows: 1. review events and changes in circumstances for possible impairment. 2. If events or changes suggest impairment, determine if the sum of the expected future net cash flows from the long lived asset is less than the carrying amount of the asset. If it is less, measure the impairment loss. 3. The impairment loss is the amount by which the carrying amount of the asset exceeds fair value.
After a company records an impairment loss, the reduced carrying amount of the long lived asset is its new cost basis. Impairment losses may not be restored for assets held for use. If the company expects to dispose of the asset, it should report the impaired asset at the lower of cost or net realizable value. It is not depreciated, It can be continuously revalued, as long as the write up is never to an amount greater than the carrying amount before impairment.

Front 7

Explain the accounting proceedures for depletion of natural resoucres.

Back 7

To account for depletion of natural resources, companies 1. establish the depletion base, and 2. write off resource cost. Four factors are part of developing the depreciation base.: acquisition costs, exploration costs, development costs, and restoration costs. To write off resource cost, companies normally compute depletion on the units of production method. Thus, depletion is a function of the number of units withdrawn during the period. To obtain a cost per unit of product, the total cost of the natural resource less salvage value is divided by the number of units estimated to be in the resource deposit, to onbtain a cost per unit of prodct. To compute depeltion, this cost per unit is multiplied by the number of units withdarwan.

Front 8

Explain how to report plant, property, and equipment and natural resources.

Back 8

The basis of valuation for PP&E and natural resources should be disclosed with pledges, liens, and other committments related to those assets. Companies should not offset any liability secured by property, plant and equipment or by natural resources against these assets but should report it in the liabilities section. When depreciating assets, credit a valuation account normally called accumulated depreciation. When depleting assets, use an accumulated depletion account, or credit depletion directly tot he nautuarl resource account. Companies engaged in significant oil and gas producing activiites must provide additional disclosures about these activities. Analysis may be performed to evaluate the asset turnover raqtion, profit margin on sales, and rate of return on assets.

Front 9

Accellerated depreciation methods

Back 9

Take more depreciation cost in earlier years and lower in later years because theoretically the asset is most valuable early on.

Front 10

Activity method depr equation

Back 10

cost less salvage times hours this year divided by total estimated hours equals depreciation charge.

Front 11

Amortization

Back 11

The expiration of intangible assets, such as patents or copyrights.

Front 12

Declining balance method

Back 12

Do not deduct salvage value. Rather, the declining balance rate is multiplied by the book value of the asset at the beginning of each period. Double declining depreciates at 2x straight line rate.

Front 13

Depletion

Back 13

refers to allocating the cost of natural resources.

Front 14

Development costs

Back 14

broken into two categories.1. tangible equipment costs and 2. intangible development costs. Tangible costs include transportation and other heavy equipment needed to extract the resource and get it ready for market. Because companies can move the equipment from one site to the next, they don't include it in the depletion base. Intangible costs are items such as drilling costs, tunnels, shafts, and wells. These do not have any tangible characteristics but are needed for production of the natural resource. These are considered part of the depletion base.

Front 15

Exploration costs

Back 15

Companies get the right to property and incurs exploration costs needed to find the resource. When these costs are large, they are included in the depletion base.

Front 16

Full cost concept

Back 16

Controvercy relates to exploration costs in oil and gas indudstry. Full cost concept argue the cost of drilling a dry hole is a cost needed to find the commercially profitable well.

Front 17

Impairments

Back 17

when the carrying amount of the asset is not recoverable the company records a write off referred to as an impairment. Must apply recoverability test to see if the sum of expected future net cash flows is less than the carrying amount of an asset then the asset is impaired. And the difference between the carrying amount and the FV of the equip is recorded as an impairment loss.

Front 18

Inadequacy

Back 18

results when an asset ceases to be useful to a company because the demands of the firm have changed. An example would be the need for a larger building to handle increased production. Although the old building is sound, it may have become indaequate for the company's purpose.

Front 19

Liquidating dividends

Back 19

A company often owns as its only major asset a property from which it intends to extract natural resources. If the company does not expect to purchase additional properties, it may gradually distribute to stockholders their capital investments by paying liquidating dividends, which are dividends greater than the amount of accumulated net income.

Front 20

Natural resources

Back 20

often called wasting assets, include petroleum, minerals, and timber. Their characteristics aare 1. complete removal (consumption) of the asset, 2. replacement of the asset only by an act of nature.

Front 21

Obsolesence

Back 21

the catch all for situations not involving inadequacy and supersession.

Front 22

recoverability test.

Back 22

Used to determine whether or not there is an impairment. If review indicates impairment, apply the recoverability test. If the expected future net cash flows from the long lived asset is less than the carrying amount of the asset, the asset is impaired.

Front 23

Resroration costs

Back 23

Companies sometimes incur substantial costs to restore property to its natural state after extraction has occurred. These are restoration costs. Companies include these costs as part of the depletion base.

Front 24

Salvage value

Back 24

The estimated amount that a company will receive when it sells the asset or removes it from service. It is the amount to which companies write down assets to during their depreciable life.

Front 25

Straight line method

Back 25

Considers depreciation as a function of time. Equation cost less salvage divided by estimated service life equals depreciation charge.

Front 26

Successful efforts concept.

Back 26

In the controversy telated to exploring for oil and gas costs, these people believe only relevant measure for a project is the cost directlyu related to that project and as such companies should only capitalize the costs of successful projects.

Front 27

Sum of the years digits

Back 27

Based on decreasing fraction of depreciable cost. Each fraction uses the sum of hte years as a denominator. formula is n(n+1)/2 so if it was in use for 51 years it'd be 51(52)/2 or 1,326. The numerator is the number of years estimated life remaining at the beginning of the year. At the end the balance remaining should equal the salvage value.

Front 28

Supersession

Back 28

the replacement of one asset with another more efficient and economical asset. Examples would be the replacement of the mainframe computer with a PC net work , or the replacement of a Boeing 767 with a Boeing 787.