Financial Accounting Ch. 10

Front 1

depreciation

Back 1

the periodic transfer of cost to expense

Front 2

2 kinds of depreciation

Back 2

1. physical depreciation
2. functional depreciation

Front 3

physical depreciation

Back 3

from wear and tear while in use and from the action of the weather

Front 4

functional depreciation

Back 4

when a fixed asset is no longer able to provide services at the level for which it was intended

Front 5

Depreciation expense factors

Back 5

Initial Cost - Residual Value = Depreciable Cost

Front 6

3 factors in accounting for depreciation

Back 6

1. initial value
2. expected useful life
3. residual value (scrap value, salvage value, trade-in value)

Front 7

3 methods used for depreciation

Back 7

1. straight-line method
2. units-of-production
3. declining-balance

Front 8

Straight-line method

Back 8

provides for the same amount of depreciation expense for each year of the asset's useful life

(inital cost - residual value) / # of years

Front 9

unit-of-product method

Back 9

provides for the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset

calculated by multiplying the unit depreciation by the number of units produced or used during the period

Front 10

declining-balance method

Back 10

provides for a declining periodic expense over the estimated useful life of the assets; to apply this method, the annual straight-line depreciation rate is doubled; aka accelerated depreciation method

Front 11

book value

Back 11

cost minus accumulated depreciation

Front 12

MACRS (Modified Accelerated Cost Recoery System)

Back 12

Internal Revenue Code for use by business in computing depreciation for tax purposes

Front 13

Composite-Rate Method

Back 13

Grouping and computing depreciations of assets with common traits (i.e. office equipment & store fixtures)

Front 14

Capital expenditure

Back 14

costs of acquiring fixed assets, adding to a fixed asset, improving a fixed assets, or extending a fixed asset's useful life
(affect depreciation expense of more than 1 period)

Front 15

Revenue expenditure

Back 15

costs that benefit only the current period or costs incurred for normal maintenance and repairs
(affect expenses of only the current period)

Front 16

4 stages of costs incurred for fixed assets

Back 16

1. preliminary
2. preacquisition
3. acquisition and construction
4. in-service

Front 17

preliminary stage

Back 17

*before* management believes acquiring a fixed asset is probable (feasibility studies, marketing studies, financial analyses etc.);
recorded as "revenue expenditures"

Front 18

preacquisition stage

Back 18

acquiring fixed asset has become probable, but not yet occurred
(surveys, zoning, engineering studies etc.);
treated as "capital expenditure"

Front 19

acquisition or construction stage

Back 19

acquisition has occurred or construction has begun;
capitalize in the "fixed asset" account or "construction in progress" account;
when fixed asset is ready for use, transfer the capitalized costs to related fixed asset account

Front 20

in-service stage

Back 20

fixed asset is complete and ready for use;
depreciation begins;
normal, recurring, or periodice repairs/maintenance charges recorded under "maintenance expense" for the period

Front 21

replacing a component

Back 21

2 steps:
(1) dibit book value to "Depreciation Expense," and credit to "Accumulated Depreciation"
(2) capitalize identifiable costs associated with the new component