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
