Ch 10 Depreciation, Impairments, and Depletion

Question 1

Because these methods allow for higher early-year expenses than in the straight-line method, they are often called _______________

ex: decreasing-charge methods

Answer 1

accelerated depreciation methods

Question 2

Also called the variable-charge or units-of-production approach

Assumes that depreciation is a function of use or productivity, instead of the passage of time. In other words, more depreciation should be recognized the more the asset is used.

Answer 2

activity method

Question 3

Cost allocation of intangible assets (such as patents and copyrights)

Answer 3

amortization

Question 4

How efficiently a company uses its assets to generate sales is measured by

Calculated by net sales/ average total assets

Answer 4

asset turnover

Question 5

In this method, the assets are larger in value and often contain numerous components

Answer 5

composite method

Question 6

Normally, companies compute depletion aka _____________, on a units-of-production method. That means depletion is a function of the number of units extracted during the period.

Answer 6

cost depletion

Question 7

A second decreasing-charge depreciation method

The _______________ determines depreciation expense by applying a constant percentage to the declining book value of the asset each year. This method does not deduct the salvage value in computing depreciation expense.

Answer 7

declining-balance method

Question 8

______________ provide for a higher depreciation expense in the earlier years and lower expense in later years

Answer 8

decreasing-charge method

Question 9

Cost allocation of natural resources (such as timber, gravel, oil, and coal)

Answer 9

depletion

Question 10

Cost allocation of property, plant, and equipment. Remember that land is not ___________, but land improvements are ___________

Answer 10

depreciation

Question 11

Divided into two parts:
1. tangible equipment costs and 2. intangible development costs

Answer 11

development costs

Question 12

Companies use various multiples for the declining balance method in practice, although the __________ is quite common

A form of accelerated depreciation that doubles the regular depreciation approach

Answer 12

double-declining-balance method

Question 13

As soon as a company has the right to use the property, it often incurs ________ to find the resource

Answer 13

exploration costs

Question 14

Those who support the ____________ argue that the cost of drilling a dry hole is a cost needed to find the commercially profitable wells.

Answer 14

full-cost concept

Question 15

Use when the assets are similar in nature and have approximately the same useful lives

Closely approximates a single-unit cost procedure because any deviation from the average amount in most cases is not that great

“mass basis”

Answer 15

group method

Question 16

The write-off of all or part of the carrying value of property, plant, and equipment is referred to as ______________

Answer 16

impairment

Question 17

If the company does not expect to purchase additional properties, it may gradually distribute to stockholders their capital investments by paying _____________, which are dividends greater than the balance in retained earnings.

Answer 17

liquidating dividends

Question 18

In the Tax Reform Act of 1986 Congress enacted _________. It applies to depreciable assets placed in service in 1987 and later.

Answer 18

Modified Accelerated Cost Recovery System (MACRS)

Question 19

Such as petroleum, minerals, and timber, are used in a company’s operations. These assets have two main features:
1. the complete removal (consumption) of the asset
2. Replacement of the asset only by an act of nature

Answer 19

natural resources

Question 20

Another measure for analyzing the use of property, plant, and equipment

Calculated as net income/ net sales

Answer 20

profit margin on sales

Question 21

A test used to determine whether an impairment has occurred

Answer 21

recoverability test

Question 22

Companies sometimes incur substantial costs to restore property to its natural state after extraction has occurred

Answer 22

restoration costs

Question 23

Calculated by net income/ average total assets
OR profit margin on sales x asset turnover

Answer 23

return on assets (ROA)

Question 24

The estimated amount that a company will receive when it sells the asset or removes it from service. The ____________ is not depreciated because the company expects to receive that amount when the asset is later sold or scrapped. It is the amount to which a company writes down or depreciates the asset during its useful life.

Answer 24

salvage value (disposal value)

Question 25

Considers depreciation as a function of time rather than a function of usage

Answer 25

straight-line method

Question 26

When others believe that companies should capitalize only the costs of successful projects. Its proponents believe that the only relevant measure for a project is the cost directly related to that project, and that companies should report any remaining costs as period charges.

Answer 26

successful-efforts concept

Question 27

The _______________ results in a decreasing depreciation expense based on a decreasing fraction of the depreciable base (original cost less salvage value).

Answer 27

sum-of-the-years’-digits method