Chapter 18 Flashcards
How do you calculate depletion?
Cost of natural resource divided by the estimated units of the resource
What is the formula for straight line depreciation
Cost - salvage value divided by years in service
What is the formula for Sum of The Years Digits?
You purchased a truck for 25k. The value at the end of it’s life, 5 years, is 5k.
Fraction of year in use multiplied by the acquisition cost minus net salvage.
The fractional part of the asset cost is charged to expense every year. The bottom part of the fraction is always the SUM of ALL the YEARS in SERVICE (5 yrs = 1 +2+3+4+5=15). TOP part of the fraction is the number of years remaining in the useful life of the asset. 1st year (5/15) 2nd year (4/15) etc.
Fraction DIVIDED by acquisition cost MINUS net salvage.
What is the formula for Declining Balance depreciation?
Aquisition cost DIVIDED by useful life MULTIPLIED BY THE PERCENTAGE of the useful life used. The depreciation amount is subtracted from the asset’s value every year before calculating more depreciation
5 years = DEPRECIATES 20% a year = 100% after 5 years
10 years = DEPRECIATES @ 10% each year = 100% after 10 years
What is the formula for DOUBLE declining Balance?
Straight line depreciating rate TIMES % determined by the number of years in service TIMES 2. (5 years = 20%x2 = 40%)
Example: I bought a chair for $2000. I will use it for 5 years.
Value: 2000
Salvage: 100
Years: 5 (if 5 years is 100%, then EACH year the chair’s value decreases by 20% = 100% in 5 years)
Value: 2000/5 years (straight line) = 400 x (annual rate of 20% x 2) 40% = $160 depreciation. In year TWO you subtract depreciation expense from value and multiply by 40% until the asset the year when the asset reaches or is less than salvage value.
Which depreciation method allocates greater amounts of depreciation at the beginning of an asset’s life?
Declining-Balance Method
What is DDB
Double Declining Balance
Units of Output method categorizes what?
Physical quantities of production, number of hours an asset is used, other measures (Mileage)
Modified Accelerated Cost Recovery System is called what
MACRS
MACRS has a table of percentages. What is the formula for determining cost recovery with MACRS?
Multiply asset’s cost by the MACRS percentage. Salvage value is ignored.
Does land depreciate?
No
What is amortization?
Periodic transfer of intangibles cost to expense.
What is an example of an intangible asset?
Patent, copyright, trademark, trade name, brand name, goodwill, software.
How do you find the PER UNIT value of natural resources like ore or minerals?
Cost of natural resources DIVIDED by estimated units of the resource (tons of ore, barrels of oil, etc) EQUALS the depletion per unit. THIS IS AN EXPENSE NOT REVENUE OR INCOME
What is it called when the book value exceeds the “Fair value” of an asset?
Impairment
