Depreciable Assets And Depreciation

Front 1

What are the types of Depreciation?

Back 1

1. Physical
2. Functional

Front 2

Note

Back 2

Physical depreciation is the type of depreciation that is related to an asset's deterioration and wear over a period of time.

Front 3

Note

Back 3

Functional depreciation is the type of depreciation that arises from obsolescence or inadequacy of the asset to perform efficiently.

Front 4

Note

Back 4

Depreciable asset estimated useful life may be revised at any time but any revision must be accounted for prospectively, in current and future periods only (change in estimate).

Front 5

Note

Back 5

The depreciable base is the amount Subject to depreciation which is the difference between the cost and residual or salvage value.

Front 6

Note

Back 6

Under IFRS, the depreciation method used should reflect the expected pattern of fixed asset consumption. Additionally, under IFRS, estimated useful life, salvage value, and the depreciation method used should be reviewed for appropriateness at each balance sheet date. These are not requirements under U.S. GAAP.

Front 7

What are the advantages of Component Depreciation over Composite Depreciation?

Back 7

1. Depreciation expense for the year would be more accurate because each component item would be depreciated over its useful life.
2. Repair and maintenance expense would be more accurate because replacements of components would be excluded.

Front 8

Note

Back 8

IFRS require component depreciation. Separate significant components of a fixed asset with different lives should be recorded and depreciated separately. The carrying amount of parts or components that are replaced should be derecognized.

Front 9

What is meant by composite depreciation?

Back 9

This is the process of averaging the economic lives of a number of property units and depreciating the entire class of assets over a single life.

Front 10

Note

Back 10

No gain or loss is recognized when one asset in the group is retired.

Front 11

Note

Back 11

If the average service life of the group of assets has not been reached when an asset is retired, the gain or loss that results is absorbed in the accumulated depreciation account. The accumulated depreciation account is debited (credited) for the difference between the original cost and the cash received.

Front 12

What is the entry that should be recorded for the disposal of a composite asset?

Back 12

Front 13

What is the sum-of-the-year’s-digits method?

Back 13

The sum-of-the-years'-digits method is one of the accelerated methods of depreciation that provides higher depreciation expense in the early years and lower charges in the later years.

Front 14

Note

Back 14

Formula of the sum of the year’s digit is

Front 15

Note

Back 15

When dealing with an asset with a long life, it is necessary to use the general formula for finding the sum-of-the-years'-digits:

Front 16

Note

Back 16

Double-declining balance depreciation is calculated using the following formula:

Front 17

Note

Back 17

The only method that Ignore salvage value in the annual calculation of depreciation is the declining balance method. Salvage value is only used as the limitation on total depreciation.

Front 18

Note

Back 18

Front 19

What is the formula for the depreciation method called “Units of Production“?

Back 19

Front 20

What is the information that should be disclosed in the financial statements or the notes thereto relating to Depreciation?

Back 20

1. Depreciation expense for the period.
2. Balance of major classes of depreciable assets by nature or function.
3. Accumulated depreciation allowances by classes or in total.
4. The methods used, by major classes, in computing depreciation.

Front 21

What are the advantages of the straight line method of Depreciation?

Back 21

1. Simple to compute.
2. Applies to virtually all assets.
3. Consistent from year to year.
4. Wide acceptability.
5. Similar to treatment of prepaid items.

Front 22

What is the Journal entry of the partial impairment of depreciable fixed assets?

Back 22

Front 23

What are the disadvantages of the straight line method of Depreciation?

Back 23

1. Does not reflect difference in usage of asset from year to year.
2. Does not accurately match costs with revenue.

Front 24

What are the advantages of the Units of production method of Depreciation?

Back 24

1. Matches costs with revenues.
2. Reflects activity of the enterprise.

Front 25

What are the disadvantages of the Units of production method of Depreciation?

Back 25

1. If no activity, no depreciation expensed; however, in reality, all assets depreciate.
2. Cannot be used for all assets (e.g., buildings).
3. Can be complex because it requires clerical work and records.

Front 26

What are the advantages of the Double declining balance method of Depreciation?

Back 26

1. Matches costs to revenues since greater utility is reflected in greater depreciation during earlier years.
2. As the amount of depreciation decreases, repairs and maintenance charge increase thereby tending to balance out one another.

Front 27

What are the disadvantages of the Double declining balance method of Depreciation?

Back 27

1. Does not reflect changes in the activity of the asset.
2. Computation can be complex.
3. Greater disparity in amount of depreciation between earlier years and later years.
4. Possibility that with decreasing depreciation and increasing repairs and maintenance, income is artificially smoothed over the years.

Front 28

Note

Back 28

Depletion is the allocation of the cost of wasting natural resources such as oil, gas, timber, and minerals to the production process.

Front 29

Note

Back 29

Residual Value is the monetary worth of a depleted asset after the resources have been removed.

Front 30

Note

Back 30

Cost depletion is computed by dividing the cost base (Cost- SV) / estimated recoverable units to arrive at a cost depletion rate which is multiplied by units produced.

Front 31

Note

Back 31

Percentage Depletion is based on a percentage of sales.

Front 32

Note

Back 32

The depletion base may be calculated as:
a. Cost to purchase property.
b. Plus: Development costs to prepare the land for extraction.
c. Plus: Any estimated restoration costs.
d. Less: Residual value of land after the extraction of the resources (e.g., mineral ore, oil, etc.).

Front 33

Note

Back 33

Total depletion is calculated by multiplying the unit depletion rate times the number of units extracted.

Front 34

Note

Back 34

The amount of depletion to be included in cost of goods sold is calculated by multiplying the unit depletion rate by the number of units sold.

Front 35

Note

Back 35

Depletion applicable to units extracted but not sold is allocated to inventory as direct materials.