Chapter 10: Depreciation, Impairments, and Depletion

declining-balance method

determines depreciation expense by applying a constant percentage to the declining book value of the asset each year

profit margin on sales

determines how profitably the company used assets during that period of time in a measure of the return on assets net income / net sales

liquidating dividends

dividends greater than the balance in retained earnings

exploration costs

expenditures such as drilling a well, or excavating a mine, or any other costs of searching for natural resources

development costs

for natural resources, costs incurred after the resource has been discovered but before production begins

asset turnover

measures how efficiently a company uses its assets to generate sales net sales / average total assets

return on assets (ROA)

measures profitability net income / average total assets profit margin on sales x asset turnover

decreasing-charge methods

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

sum-of-the-years'-digits method

results in a decreasing depreciation expense based on a decreasing fraction of the depreciable base

full-cost concept

the cost of drilling a dry hole is a cost needed to find the commercially profitable wells

salvage value (disposal value)

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

impairment

the write-off of all or part of the carrying value of property, plant, and equipment

composite method

used when the assets are dissimilar and have different useful lives

group method

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

natural resources

wasting assets such as petroleum, minerals, and timber that are consumed physically over the period of use and do not maintain their physical characteristics

accelerated depreciation methods

a depreciation method that writes off a relatively larger amount of the asset's cost nearer the start of its useful life than the straight-line method does

Modified Accelerated Cost Recovery System (MACRS)

a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications

cost depletion

a method of allocating the cost of natural resources to accounting periods, normally computed on a units-of-production method

recoverability test

a test used to determine whether an impairment has occurred

double-declining-balance method

an accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset's decreasing book value by a constant percent that is two times the straight-line depreciation rate

activity method

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

successful-efforts concept

companies should capitalize only the costs of successful projects

straight-line method

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

amortization

cost allocation of intangible assets

depletion

cost allocation of natural resources

depreciation

cost allocation of property, plant, and equipment

restoration costs

costs to restore property to its natural state after extraction has occurred