Cpa Review- Far 4-4 (Depreciable Assets And Depreciation)

Front 1

Types of Depreciation

Back 1

1. Physical Depreciation: related to an asset's deterioration and wear over a period of time.
2. Functional Depreciation: arises from obsolescence or inadequacy of the asset to perform efficiently.

Hint 1

-Obsolescence may result from diminished demand for the product that the depreciable asset produces or from the availability of a new depreciable asset that can perform the same function for substantially less.

Front 2

Salvage Value

Back 2

-Estimate of the amount that will be realized at the end of the useful life of a depreciable asset.

Hint 2

-Frequently, assets have little or no salvage value at the end of their useful life and, if immaterial, the amount(s) my be ignored when calculating depreciation.

Front 3

Estimated Useful Life

Back 3

-Period of time over which an asset's cost will be depreciated. May be revised any time but any revision must be accounted for prospectively, in current and future periods only (change of estimate).

Hint 3

-PAY CLOSE ATTENTION TO DATES, CPA exam will frequently have an asset placed in service during the year. Requires computing depreciation for part of a year rather than the full year.

Front 4

Depreciation Methods

Back 4

-Goal is to provide for a reasonable, consistent matching of revenue and expense by systematically allocating the cost of the depreciable asset over its estimated useful life.

Hint 4

-Accomplished by using a contra account, such as accumulated depreciation or allowance for depletion.

Front 5

Depreciable Base

Back 5

-The amount subject to depreciation.

Hint 5

-Difference between cost and residual/salvage value

Front 6

U.S. GAAP vs. IFRS- Depreciation Methods

Back 6

-Under IFRS the depreciation method used should reflect the expected pattern of fixed asset consumption.

Hint 6

-Estimated useful life, salvage value, and the depreciation method used should be reviewed for appropriateness each B/S date.
-Not requirements under GAAP.

Front 7

Component Depreciation

Back 7

-Not available for MACRS recovery property for tax purposes b/c depreciation expense under the component method is generally higher and MACRS is already high. However, does appear to be available when straight-line depreciation is elected.
-Advantages:

Hint 7

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

Front 8

U.S. GAAP vs. IFRS- Component Depreciation

Back 8

-IFRS requires component depreciation. Separate components of a fixed asset w/ different lives should be accounted for separately.

Hint 8

-The carrying amount of parts of components that are replaced should be derecognized.

Front 9

Composite or Group Depreciation

Back 9

-Process of averaging the economic lives of a number of property units and depreciating the entire class of assets over a single life, thus simplifying record keeping of assets and depreciation calculations.

Hint 9

-Composite (Dissimilar Assets), Group (Similar Assets).

Front 10

Composite Depreciation- No Gain/Loss

Back 10

-When a group or composite asset is sold or retired, the A/D is treated differently than the A/D of a single asset.
-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 A/D account.

Hint 10

-The A/D account is debited (credited) for the difference between the original cost and the cash received.
-A/D account is the third step in the J/E and is a plug number.

Front 11

Straight-Line Method

Back 11

-Determined by the formula:
(Cost - Salvage Value) ÷ Estimated Useful Life = Depreciation

Hint 11

-Estimated useful life is usually stated in periods of time, such as years or months.

Front 12

Sum-of-the-Years'-Digits Method

Back 12

-One of the accelerated methods of depreciation that provides higher depreciation expense in the early years and lower charges in the later years.
-Each year is progressively numbered and and then added and becomes the denominator

Hint 12

-Simple denominator formula: (N x (N+1)) ÷ 2
-Numerator is the remaining life of the asset at the beginning of the current year.
-Depreciation Expense = (Cost - Salvage Value) x (Remaining life of asset ÷ Sum-of-the-years' digits)

Front 13

Declining Balance Method

Back 13

-Most common of the accelerated methods, although other alternative (less than double, ex: 150%) methods are acceptable.
-Useful for assets that are subject to rapid obsolescence.
-Each year's depreciation rate is double the straight-line rate. In the final year, the asset is depreciated to its salvage value, if any.

Hint 13

-Depreciation Expense = 2 x (1 ÷ N) x (Cost - A/D)*
*NBV, ignore salvage value
-No allowance is made for salvage value b/c the method always leaves a remaining balance, which is treated as salvage value. However, the asset shouldn't be depreciated below the estimated salvage value.

Front 14

Units-of-Production Method

Back 14

-Relates depreciation to the estimated production capability of an asset and is expressed in a rate per unit or hour. Realistic b/c service potential declines with use.

Hint 14

-Step 1: Rate per Unit or Hour = (Cost - Salvage Value) ÷ Estimated Units or Hours
-Step 2: Depreciation Expense = (Rate per Unit or Hour) x (# of Units or Hours Worked)

Front 15

Depletion

Back 15

-The allocation of the cost of wasting natural resources such

Hint 15

as gas, oil, timber, and minerals to the production process

Front 16

Purchase Cost

Back 16

-Includes any expenditures necessary to purchase and then prepare the land for the removal of resources.

Hint 16

-Drilling costs, tunnel shaft costs (oil industry), prepare asset for harvest (lumber industry)

Front 17

Residual Value

Back 17

-Monetary worth of a depleted asset after the resources have been removed.

Hint 17

-Similar to salvage value.

Front 18

Depletion Base

Back 18

-Cost to purchase the property minus the estimated net residual value remaining after all resources have been removed from the property

Hint 18

-(Cost - Residual Value)

Front 19

Cost Depletion Method

Back 19

-(GAAP) Computed by dividing the current estimated recoverable units into unrecovered cost (less salvage) to arrive at a cost depletion rate.

Hint 19

-(Base ÷ Estimated Recoverable Units) = Rate
-Depletion rate x Units produced = cost to allocate to production

Front 20

Percentage Depletion Method

Back 20

-(Not GAAP, Tax Only) Based on a % of sales. Allowed by Congress as a tax deduction to encourage exploration in very risky businesses.
-Can (and usually does) exceed cost depletion.

Hint 20

-Limited to 50% of net income from the depletion property computed before the % depletion allowance.

Front 21

Unit Depletion Rate Method

Back 21

-Amount of depletion recognized pre unit (ton, barrel, etc.) extracted. Calculated by dividing the depletion base by estimated recoverable units.
-Depletion Base: may be calculated as (1) Cost to purchase property, (2) + developmental costs, (3) + any estimated restoration costs, (4) - residual value

Hint 21

-Calculation of Depletion: total depletion is calculated by multiplying the unit depletion rate times the number of units extracted.
-If all units aren't sold, depletion must be allocated between COGS and inventory. Units extracted but not sold is allocated to inventory as direct materials.