ACC 358 Chapter 11

true regarding depletion?

Units-of-production depreciation on assets used for natural resources often uses the same activity base that is used to calculate depletion. Depletion is a product cost and is included in the cost of inventory of the resource extracted.

an activity-based depreciation method?

Units-of-production method

accumlated depreciation

a contra asset account that represents the cumulative amount of the assets cost that has been depreciated in all prior years including the current one.

what items should be considered when choosing an allocation method for a long-term asset?

a pattern in which the services are obtained from its use a systematic and rational allocation method

When accounted for using IFRS, the revaluation option can be applied to

all intangible assets other than goodwill

The three factors that should be established to measure cost allocation are

allocation base. service life. allocation method.

the allocation of the cost of an intangible asset is referred to as

amortization

for intangible assets used to manufacture a product

amortization is a product cost and is included in the cost of inventory (doesn't become an expense until inventory is sold)

depreciation expense

is the portion of the assets cost that is allocated to an expense in the current year

What limits the useful life of an intangible asset?

legal, regulatory, or contractual provisions

If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might be

less than its legal life

If an IFRS-reporting company chooses to report its intangible assets at fair value, the revaluation option

must be applied to all assets within that class of intangible assets

A retirement or abandonment of an asset is different from a sale of an asset because

no consideration is received. a loss must be recognized for the remaining book value.

for intangible assets not used in production

periodic amortization is expenses in the period incurred

The method of amortization used for intangible assets

should reflect the pattern of use of the asset. is most commonly straight-line.

Accelerated methods of depreciation

sum-of-the-years' digits method declining balance method

residual value (salvage value)

the amount the company expects to receive from selling the asset at the end of its service life less any disposal costs

The cost of a natural resource less its anticipated residual value is called

the depletion base

The formula to calculate the depletion rate of a natural resource is

the depletion base divided by the estimated extractable amount of natural resource.

service life

the estimated use that the company expects to receive from the asset

Under U.S. GAAP, when property, plant, and equipment are held for sale, the assets are reported at

the lower of its book value or fair value less costs to sell.

allocation method

the pattern in which the allocation base (usefulness) is expected to be consumed

Under IFRS, biological assets are valued at

their fair value less estimated cost to sell

The two approaches for a systematic and rational allocation of the cost of an asset over its useful life are

time-based methods. activity-based methods.

residual value for intangible assets

usually zero unless there is a commitment to sell it at the end of it useful life then you will use that amount as the residual value

intangible assets with finite useful lives

will be amortized

intangible assets with indefinite useful lives

will not ne amortized

deprecation expense using units production

((cost - residual value) / total hours) * hours used

intangible assets that are usually considered to have indefinite lives?

Trademarks

characteristics of goodwill?

Subject to impairment testing Indefinite life

double declining balance method (DDB)

200% of the straight line rate is multiplied by book value

Depletion

Allocation of the cost of a natural resource over its service life

Amortization

Allocation of the cost of an intangible asset over its service life

Companies use accelerated depreciation for tax purposes because

An accelerated method lowers taxes in the early years of an asset's life.

Identify accounting standards that permit intangible assets to be reported at fair value subsequent to acquisition.

IFRS

true regarding property, plant, and equipment or intangibles held for sale?

If the fair value less costs to sell is below book value, an impairment loss is recognized. The assets held for sale are not depreciated or amortized.

Under what circumstances is depreciation included in inventory?

In a manufacturing environment.

Declining Balance Depreciation

Multiplying the book value at the beginning of the year by an annual rate that is a multiple of the straight line rate

For a manufacturing company, what type of cost is factory depreciation expense?

Product cost

asset book value

assets cost minus accumulated depreciation

when is an accelerated method of depreciation might be appropriate

benefits are derived equally over the life of the asset, but repair and maintenance expenses are expected to be higher in later years. provides greater benefits in the early years of its life than in the later years

For oil, gas, and most mineral natural resources,

companies are allowed to use percentage depletion for income tax purposes. depletion could exceed the asset's cost for income tax purposes.

a gain or loss is recognized for the difference between

consideration received and the assets book value

When determining how to allocate depreciation, a method should be selected that

corresponds to the pattern of benefits received from the asset's use.

Depreciation

cost allocation for plant and equipment

under US GAAP biological assets are valued at

cost less a accumulated depletion/ deprecation

For IFRS reporting, intangible assets may be valued at

cost less accumulated amortization. fair value.

Declining balance depreciation methods multiply

cost less accumulated depreciation by an annual rate that is a multiple of the straight-line rate.

allocation base

cost of the asset expected to be consumed during its service life.

the journal entry to record disposal with gain

debit cash and accumulated deprecation credit equipment and gain on sale

journal entry to record disposal with loss

debit cash, accumulated deprecation, and loss on sale credit equipment

journal entry to deplete resource

debit depletion credit coal mine

journal entry to record depreciation

debit depreciation expense, credit accumulated depreciation

depletion per ton

depletion base / estimated extractable tons

If equipment used in excavation of natural resources is not movable from site to site, it should be

depreciated over the shorter of its useful life or the life of the natural resource.

striaght line depreciation

depreciates an equal amount of the depreciable base to each year of the assets service life

The allocation of the cost of a tangible fixed asset is referred to as

depreciation

record expense instead of asset account

depreciation expense was understated by $210,000, but other expenses were overstated by $350,000. This means that net income over the three-year period from 2018 through 2020 is understated by $140,000, which means retained earnings is understated by $140,000 by the end of 2020.