chapter 11

Modified Accelerated Cost Recovery System (MACRS)

For assets purchased in 1987 and later, ACRS was modified and is known as the

one-half year convention

all assets placed in service or sold during the fiscal year are considered to have been placed in service or sold at the midpoint of the year.

straight-line method

allocates an equal amount of an asset's depreciable cost to depreciation expense for each period of the asset's service life.

acquisition costs

amounts paid to acquire the rights to a search for an undiscovered natural resource or to use a discovered resource.

Depreciation

an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy.

nearest whole year convention

any assets placed in service during the first 6 months of the year are depreciated for the entire year, and assets placed in service during the second 6 months are not depreciated for that year.

declining balance method

are accelerated depreciation methods that recognize a declining depreciation expense amount each period by applying a constant rate to the book value of the asset at the beginning of each period.

nearest whole month convention

assets placed in service on or before the 15th of the month are depreciated for the whole month; assets placed in service after the 15th are not depreciated until the next month.

reclamation costs (restoration costs)

costs incurred to restore a natural resource to its natural state.

intangible development costs

expenditures incurred after the resource is discovered but before production begins that are necessary for production of the resource. These costs include costs for drilling, tunnels, shafts, and wells.

exploration costs

expenditures, such as drilling a well or excavating a mine, incurred to search for a natural resource.

accretion expense

is a periodic expense recognized when updating the present value of a balance sheet liability, which has arisen from a company's obligation to perform a duty in the future, and is being measured by using a discounted cash flows approach.

component depreciation

is a procedure in which the cost of an large item of property, plant and equipment is allocated to different components of the asset and each component is depreciated separately.

sum-of-the-years'-digits method

is an accelerated depreciation method that recognizes a declining depreciation expense each period by applying a decreasing fraction each year to the depreciable base of the asset.

composite depreciation

is applied to heterogeneous assets that are related but have differing service lives and residual values (all the different items of equipment in a company's office).

group depreciation

is applied to homogeneous assets that are expected to have similar service lives and residual values (e.g., laptop computers)

fair value

is the amount at which the asset could be sold in an orderly transaction between market participants

service life (useful life)

is the amount of service or use that a company expects from the asset before its disposal of an asset.

residual value (salvage value)

is the net amount that a company expects to obtain from disposing of an asset at the end of its service life

Amortization

the action or process of gradually writing off the initial cost of an intangible asset

activity method

the depreciation expense is calculated on the basis of asset's activity such as the number of units produced or the number of hours the asset is used during the period

depreciable cost (depreciation base)

Asset Cost-Estimated Residual Value= depreciation base

impairment

Because depreciation is a cost allocation process and does not attempt to measure fair value, situations may occur in which the future economic benefit or service potential of an asset decreases below its book value

depletion

The allocation of the cost of a natural resource to the periods in which benefits are received is called

double-declining-balance method

The multiple is often 2, in which case the declining-balance method is called

units-of-production method (activity method)

When the service life of the asset is affected primarily by the amount the asset is used and not by the passage of time, depreciation expense should be recognized using an