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Flashcards in Chapter 11 Deck (60):
1

Depreciation is

Cost allocation

2

Depreciation

Accounting process of allocating costs of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

3

Expiration of intangible assets such as patents or copyrights is called

Amortization

4

Fixed assets

Depreciation expense

5

Intangibles

Amortization expense

6

Natural resources

Deletion expense

7

What are the three questions in the depreciation prcoess?

1. What is the depreciable base to be used for asset

2. What is the assets useful life

3. What method of cost apportionment is best for the asset?

8

Salvage value

Estimated amount that a company will receive when it sells the asset or removes it from service

9

The service life differs from

Physical life

10

What are the two reasons companies retire assets

Physical factors (casualty or expiration of physical life)

Economic factors (obsolescence)

11

Economic or functional factors are classified into 3 categories of

1. Inadequacy
- when asset is not as useful because demand of firm have changed


2. Super session
-replacement of one asset with another more efficient and economical asset

3. Obsolescence
- catch all for situations not involving 1 and 2.

12

The better the maintenance the longer the the life of

Asset

13

In most cases the useful life of asset is based on

Past experiences with the same or similar assets

14

Activity method also called variable charge or units of production approach

Assumes that the depreciation is a function of use or productivity instead of the passage of time

15

What is the major limitation of the activity method?

It is inappropriate in situations in which depreciation is a function of time instead of activity

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When economic or functional factors affect the asset what happens?

The activity method those its significance

17

Another problem with activity method is

Is the difficulty of estimating units of output or service hours received

18

Straight line method

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

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Why do companies use the straight line method?

Bc of its simplicity

20

Two major objections to straight line is

1. Assets economic usefulness is the same each year

2. Maintenance and repair expense is essentially the same each period

21

Straight line provides a distortions in

Rate of return analysis (income/assets) develop

22

Decreasing charge methods

Provides a for a higher depreciation cost in the earlier years and lower charges in the later periods

23

Decreasing charge method is often called accelerated depreciation methods because

These methods allow for higher early year charges than in straight line method

24

What is the rationale for the accelerated methods?

Companies should charge more depreciation in the earlier. Years because the asset is more productive in the earlier years

25

Accelerate methods provide

Constant cost because the depreciation charge is lower in the later periods at the time when repair and maintenance costs are often higher

26

Sum of the years digits method

Results in a decreasing depreciation charge based on decreasing fraction of depreciable costs

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Declining balance method

Utilizes a depreciation rate (expressed as %) that is some multiple of the straight line method

28

Declining method does not deduct what

Salvage value in computing deprecation base

29

Double declining method

Depreciates assets at twice

30

Two methods of depreciating multiple asset accounts

Group method


Composite method

31

Companies frequently use group method

When the assets are similar in nature and have approximately the same useful of lives

32

They use composite approach when

Assets are dissimilar and have different lives

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Composite depreciation rate

Depreciation per year by total cost of assets

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Composite life

The length of time it takes a company to depreciate its assets on a composite basis

35

Unit method (depreciation of single assets) has several advantages over group or composite methods

1. Simplifies the computation mathematically

2. Identifies gains and losses on disposal

3. Isolates depreciation on idle equipment

4. Represents the best estimate of the depreciation of each assets o

36

Companies can create their own methods , GAAP requires only

That the method result in the allocation of an assets cost over the assets life in a systematic and rational manner

37

How do companies compute depreciation expense for partial periods?

Companies must determine t he depreciation expense for the full year and then prorate this depreciation expense between the two periods evolved

38

Companies normally compute depreciation on

Basis of the nearest full month

39

Depreciation does not involve what?

A current cash flow

40

Depreciation does not provide what for. The replacement of. Assets?

Funds

41

The funds for replacement of the assets come from the

Revenues ( generated through the use of asset?

42

The changes in estimate should be recorded when

In the current and prospective periods

There should be no changes in the prior periods

And there is no adjusting opening balances or attempt to catch up for period periods

43

Why is there no adjustment. Or catching up for prior periods?

Changes in estimates are continual and inherent part of the estimation process

44

Impairments

Considering the write off of their long lived assets

45

What are events and changes in circumstances that might lead to an impairment?

1. A significant decrease in the FV of asset

2. A significant change in the extent or manner in which an asset is used

3. A significant adverse change in legal factors or in the business climate that affects value of asset

4. An accumulation of costs significantly in excess of amount originally expected to acquire or construct an asset

5. A projection or forecast that demonstrates continuing losses associated with an asset

46

The events or changes in circumstances indicate that the company may not be able to

Record the carrying amount of the asset

47

Recoverability test

Is used to determined whether an impairment has occurred or not

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Steps of recoverability test

1. Estimate future cash flows expected from use of asset and its eventual disposition


(If sum of expected cash flow < carrying amount = impaired)

Sum expected cash flow is > or equal to carrying amount = no impairment

49

Recoverability test relies on a basic presumption

Balance sheet should report long lived assets at no more than carrying amounts that are recoverable

50

What is the impairment loss?

Carrying value of asset > FV

51

Fair value of asset is measured based on

Market price if an activate market for asset exists

52

If no market exists then UPS uses

PV of expected future cash flows to determine fair value

53

After recording an impairment loss , the reduced carrying amount of asset becomes what?

New cost basis

54

A company does not change the new cost basis except when

For depreciation or amortization in future periods for additional impairments

55

May not restore an impairment loss for an

Asset held for use

56

Assets that are held for disposal are like inventory should they should be reported at

Lower of cost or net realizable value

57

You can write up or down an asset held for disposal in future periods as long as

Carrying value after write up never exceeds the carrying amount of asset before impairment

58

Losses and gains related to impaired assets should be recorded as part of

Income from continuing operations

59

Because of significant impact on financial statements of depreciation methods used, the following should be disclosed

1. Depreciation expense for the period

2. Balances eye of major classes of depreciable assets by nature and function

3. Accumulated depreciation, either by major classes of depreciable assets or in total

4. A general descruption of method or methods used in computing depreciating with respect to major classes of depreciable assets

60

Asset turnover

How efficiently a company uses its assets to generate sales