Depreciable Assets and Depreciation Flashcards
(40 cards)
How is the matching principle applied to long-lived assets that are not held for sale in the ordinary course of business?
Depreciation, amortization, or depletion
Types of depreciation
- Physical depreciation
2. Functional depreciation
Physical depreciation
Related to an asset’s deterioration and wear over a period of time
Functional depreciation
Arises from obsolescence or inadequacy of the asset to perform efficiently
What might cause obsolescence?
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 cost
Salvage/residual value
An estimate of the amount that will be realized at the end of the useful life of a depreciable asset
Estimated useful life
The period of time over which an asset’s cost will be depreciated
Goal of depreciation methods
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
Depreciable base
Cost - Salvage/Residual value = Depreciable base
What are advantages of component depreciation over composite depreciation?
- Depreciation expense for the year would be more accurate
2. Repair and maintenance expense would be more accurate b/c replacements would be excluded
Why is component depreciation not available for MACRS recovery property for tax purposes?
Because depreciation expense under the component method is generally higher and MACRS is already high
Does IFRS require component or composite depreciation?
Component
Component depreciation
Recording depreciation for each component of a unit (i.e. parts of a machine)
Composite vs. Group Depreciation
Composite = Dissimilar assets
Group = Similar assets
The process of averaging the economic lives of a number of property units and depreciation the entire class of assets over a single
Under composite/group depreciation, are gains and losses recognized when an asset in the group is retired/sold?
No. If the average service life of the group has not been reached when asset is retire, gain/loss absorbed in A/D
What are the basic depreciation methods?
- Straight-line
- Sum-of-the-Years’-Digits
- Declining balance
- Units-of-production
Straight-line depreciation
Service potential declines with time
(Cost - Salvage Value) / Estimated useful life = Depreciation
Sum-of-the-years’-digits
One of the accelerated methods of depreciation that provides higher depreciation expense in early years and lower in later years
Calculate sum-of-years’-digits
[n(n+1)]/2
or
1+2+3+4+5 = 15 (for 5 years)
Calculated depreciation expense under sum-of-years’-digits
Depreciation expense = (Cost - Salvage value) x (Remaining life of asset / Sum-of-years’ digits)
Declining balance
Asset subject to rapid obsolescence (accelerated method of depreciation)
Calculate double-declining balance depreciation
Depreciation expense = 2 x (1/N) x (Cost - A/D)
Ignore salvage value but cannot depreciate below salvage value
Calculate 1.5 times declining balance depreciation
Depreciation expense = 1.5 x (1/N) x (Cost - A/D)
Units-of-production (productive output)
Service potential declines with use
