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
