Chapter 11 Depreciation, Impairments, and depletion

Depreciation

Is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset

Sum of the years digits and declining balance methods of depreciation are accelerated methods

True

US GAAP uses both the recoverability test and The fair value test which make GAAP more conservative than the IFRS

True

Valuation accounts revalue balance sheet accounts (assets, liability and equity)

True

We depreciate assets to reduce assets when their benefits decline overtime

True

You cannot recorded and increase in fair value because US GAAP does not allow reversals of impairment due to increases in fair value

True

n = useful life

True

units extracted x cost per unit =depletion

True

The sum of the years digits method is a decreasing charge method

True;only if in whole years

Contra Accounts

Valuation accounts that always decrease the account they are associated with

Adjunct accounts

Valuation accounts that always increases the account they are associated with

Impairment

When the carrying (book value) amount of an asset is not recoverable, a company records a write off

Changes in depreciation rate

account for in the period of change and future periods (change in estimate) -not handled retrospectively (don't go back wards) -Not considered errors or extraordinary items

Computation of the depletion base involves

acquistion cost of the deposit, exploration costs, development costs, development costs, and restoration costs

Acquistion

an asset or abject bought or obtained

Beg. of the yearbook value x 2/useful life

double declining depreciation expense

2/useful life

double declining depreciation rate

Decreasing charge method

more depreciation in early years leads to less depreciation in later years

IFRS only requires the fair value test

true

The activity method is timed based so you don't have to use partial year

true

What are considered estimates?

useful life salvage value total activity

Salvage value/residual value

value expected to remain at the end of the assets useful life

Activity method is the best method of reducing benefits as they expire

True

Assets are only assets if they have future benefits

True

Depletion creates cost of inventory

True

IFRS allows impairment reversals if economic circumstances have changed

True

Most companies use the straight line depreciation method

True

Natural resources (wasting assets) include petroleum, minerals and timber

True

Restoration cost s(Once finished with natural resources)

-asset retirement obligations (AROs) -legal obligations to return the property to an acceptable state -Required to estimate costs up front and capitalize the present value

Two step process to deplete natural resources

1-Extract resource -debit Inventory credit natural resource 2-Sell resource -debit COGS and credit Inventory

How to allocate intangibles

Amortization expense

Depreciation base

Amount of the asset's cost you should depreciate over the useful life

How to allocate natural resources

Depletion expense

How to allocate fixed assets

Depreciation expense

cost-salvage value/useful life

Depreciation expense

Undepreciated years remaining/sum of the years digits

Depreciation fraction

cost-salvage value/total estimated hours

Depreciation rate

Component depreciation

If assets have identification components which have differing lives to significant values then depreciation could be taken for each component separately -IFRS requires if leads to significantly different depreciation expense

Step 1 of suspecting an impairment

Recoverability test

Double declining balance method

Salvage value is ignored Stop depreciating at salvage value

Accelerated depreciation methods

Takes more depreciation in early years compared to non accelerated methods

What is step 2 of suspecting an impairment

The far value test

Accumulated depreciation is a valuation account

True

Recoverability test

compare book value to undiscounted future net cash flows to determine if impaired -if book value of the asset is too high then the asset is impaired

Fair value test

compare the book value to fair value to determine the amount of the impaired loss

Acquisition cost of the deposit

cost to acquire an existing resource or cost of obtaining the right to search for the resourse

Development costs- Intangible

costs of drilling, electricity labor

Cost - savage value

depreciation base

Development costs-tangible physical assets

only capitalize tangible items as part of the natural resource if it does not have a separate us other than natural resources

n(n+1)/2

sum of the years digits

What can lead up to impairments?

technology changes, natural disasters, legal changes, anything that may cost the asset to loose it's benefits

Exploration costs

the costs to find the resources once you have the right to do so

Depletion

the process of allocating the cost of natural resources