PP & E: Depreciation

Question 1

How to treat a permanent impairment loss:

Answer 1

When a permanent impairment loss occurs, the book value is reduced and a loss is recorded.

The loss is credited to accumulated depreciation.

The current year’ s depreciation expense should be added and

The new book value is depreciated over the new life

Question 2

How to recognize the sale or retirement of a group or composite asset.

Answer 2

When a group or composite asset is sold or retired and the average service life has not been reached, 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.

Question 3

Sum-of -the-years’ digits method

Answer 3

Provides higher depreciation expense in the early years and lower charges in the later years.

Depreciation expense = (Cost - salvage) x Remaining life of the asset
——————————————-
Sum of the years’ digits
E.G 5 yrs :1+2+3+4+5 =15 - sum of years

1st year: 5/15 x depreciable cost
2nd year :4/15 x depreciable cost etc.

Question 4

Units of Production Method

Answer 4

Cost - salvage
———————– = Rate per unit or hour
Estimated units or hours

Rate per unit Number of units produced depreciation
(or hour) x (or hours worked) = expense

Question 5

Double declining method

Answer 5

Depreciation expense = 2 x 1 x (Cost -Accumulated Depreciation)
—–
N

Question 6

Calculation of Depletion

Answer 6

Total depletion = units depletion rate x number of units extracted.

Question 7

Calculate depletion rate

Answer 7

Unit depletion rate = Depletion base ( Cost - Residual value)
____________
Estimated recoverable units

Question 8

Depletion Base

Answer 8

Cost to purchase property
Plus: development costs to prepare the land for extraction
Plus: any estimated restoration costs
Less: residual value of land after the resources (e.g mineral ore, oil are extracted)