Depreciation-A method of cost allocation

exploration costs

Incurred as soon as the company has the right to use the property, needed to find the resource. When substantial some companies capitalize these into the depletion base.

decreasing-charge methods

provides for a higher depreciation cost in the earlier years and lower charges in later periods

supersession

the replacement of one asset with another more efficient and economical asset. ex: the replacement of the mainframe computer w/ a PC network or the replacement of a Boeing 767 with the Boeing 787.

asset turnover ratio

measures how efficiently a company uses its assets to generate sales. Net sales/average total assets for the period=dollars of sales produced by each dollar invested in cash

composite approach

method used when the assets are dissimilar and have different lives. A method of depreciating multiple-asset accounts.

group method

method used when the assets are similar in nature and have approximately the same useful life. A method of depreciating multiple-asset accounts.

accelerated depreciation methods

methods which allow for higher early-year charges than the straight-line method (decreasing-charge method)

natural resources

often called wasting assets, include petroleum, minerals, and timber. Two main features 1) the complete removal (consumption of the asset, and 2) replacement of the asset only by an act of nature.

depreciation

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.

Modified Accelerated Cost Recovery System (MACRS)

Applies to depreciable assets placed in service 1987 and later. Computes depreciation in 1) a mandated tax life, which is generally shorter than the economic life; 2) cost recover on an accelerated basis; and 3) an assigned salvage value of zero.

impairments

Write-offs of some companies long-lived assets.

development costs

divided into two parts 1) tangible equipment costs and 2) intangible development costs.

percentage depletion

Allows some companies a write-off ranging from 5 percent to 22 percent (depending on the natural resource) of gross revenue received.

full-cost concept

Argues that the cost of drilling a dry hole is a cost needed to find the commercially profitable wells. Historical cost approach.

successful-efforts concept

Companies should capitalize only the cost of successful projects. Proponents believe that the only relevant measure for a project is the cost directly related to that project, and that companies should report any remaining costs as period charges. Historical cost approach

composite depreciation rate

Depreciation per year divided by the total cost of the asset.

profit margin on sales ratio

Measure for analyzing the use of property, plant, and equipment (rate of return on sales)

rate of return on assets (ROA)

Measures the rate of return a company achieves through use of its assets.

restoration costs

Part of the Depletion Based. Substantial costs to restore property to its natural state after extraction has occurred.

liquidating dividends

When the company does not expect to purchase additional properties, it may gradually distribute to stockholders their capital investments by paying these, which are dividends greater than the amount of accumulated net income

tangible equipment costs include

all of the transportation and other heavy equipment needed to extract the resource and get it ready for market

Sum-of-the-Years'-Digits method

decreasing depreciation charge based on a decreasing fraction of depreciable cost. Uses a fraction in which the denominator is the sum of the years (5+4+3+2+1) and the numerator is the number of years of estimated life remaining as of the beginning of the year

cost depletion

depletion computed on a units-of production method. (Total cost-salvage value)/total estimated units available=depletion cost per unit.

double-declining balance method

depreciates the assets at twice (200 percent) the straight-line rate.

production variable method

hybrid depreciation used widely by the steel industry that is a combination straight-line/activity approach.

economic factors

inadequacy, supersession, and obsolescence.

intangible development costs include

such items as drilling costs, tunnels, shafts, and wells. Needed for the production of the natural resource.

depreciation base

the amount to which a company writes down or depreciates the asset during its useful life. (original cost-salvage value)

obsolescence

the catchall for situations not involving inadequacy and supersession.

salvage value

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

amortization

the expiration of intangible assets, such as patents or copyrights.

depletion

the reduction in the cost of natural resources (such as timber, gravel, oil, and coal) over a period of time.

physical factors

the wear and tear, decay, and casualties that make it difficult for the asset to perform indefinitely, they set the outside limit for the service life of an asset.

recoverability test

used to determine whether an impairment has occurred, when circumstances indicate that the company may not be able to recover the carrying amount of the asset.

declining-balance method

utilizes a depreciation rate (expressed as a percentage) that is some multiple of the straight-line method.

inadequacy

when an asset ceases to be useful to a company because the demands of the firm have changed. ex: the need for a larger building to handle increased production, although the old is sound it may have become inadequate for the company's purpose.

reserve recognition account (RRA)

yet-to-be developed method which would provide more useful information. As soon as a company discovers oil, it reports the value of the oil on the balance sheet and in the income statement. Fair value approach.