# AC321 Depreciation, Impairments, and Depletion

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```					           AC321 Chapter 11 Depreciation, Impairments, and Depletion
Review matching principle, going concern, reliability, relevance, neutrality and
economic consequences relating to standard setting
Depreciation—not valuation but allocation; systematic and rational allocation of
cost to period benefited by use. Depletion and amortization are the respective terms
relating to natural resources and intangibles
Cost
Salvage Value
Useful Life (physical and economic factors: casualty, inadequacy, supersession,
obsolescence)

Depreciation Methods
Straight-line (Cost-Salvage Value)/Useful Life
Units of Production (Cost-Salvage Value)/Total Estimated Production = Unit
Depreciation
unit depreciation x period activity
Double-Declining Balance (Cost – Accumulated Depreciation) X Rate
Rate = (100/Useful life) x 2
Do not depreciate below salvage value
Often switch to straight-line near end of useful life
Sum-of-the-Years Digits Fraction x (Cost-Salvage Value)
fraction determined: numerator = remaining life at beginning of period
denominator = n(n+1)/2

Group (similar in nature), Composite (dissimilar in nature), or Hybrid
at disposal, difference in cost and cash received is recorded in accumulated
depreciation, gain or loss not recognized; recompute depreciation rate after
purchases

MACRS Depreciation for Tax Purposes(mandated assigned tax life,
accelerated method, and zero salvage value)
Double-Declining Balance (3, 5, 7, and 10 year property)
150% Declining Balance (15 and 20 year property)
Straight Line (27.5 and 39 year property)

Use half-year convention—half-year when acquired; half year when dispose
Switch to straight line when larger than accelerated methods

Partial Depreciation—calculate to nearest full month
Change in Estimates—current and future depreciation is changed;
(Cost-Accumulated Depreciation)/Remaining Useful Life
Impairments—carrying value of asset is more than its fair value
Recoverability test: estimate future cash flows expected from use of asset and its
eventual disposition and compare with carrying value. If less than carrying value, an
impairment should be recorded for the difference in fair market and carrying value.
Depreciate using new cost basis. Once recorded, losses are not restored if value increases.
Loss on Impairment
Accumulated Depreciation

Assets to Be Disposed Of
Report at lower of cost or market
Do not depreciate
Restoration of value is allowed

Natural Resources—Coal, Oil, Gold, Iron, Timber
Costs:
Acquisition—initially recorded in “Undeveloped Property”
Exploration—usually expensed
Development—tangible equipment (depreciated not depleted)
and intangible (included in depletion)
Restoration—(included in depletion)
Units of Production
Inventory
Accumulated Depletion
Full Cost (capitalize cost of unsuccessful and successful ventures)
vs Successful Efforts (capitalize only successful ventures)
Reserve Recognition Accounting—a current value method (abandoned in 1981)

Disclosures
Depreciation expense for the period
Balances of major classes of assets
Accumulated depreciation
Description of methods used

Analysis
Asset turnover: net sales/average total assets
Profit Margin on Sales Ratio: net income/net sales
Rate of Return on Assets: net income/average total assets
International Perspectives

Ethical Issues

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 views: 20 posted: 11/4/2012 language: English pages: 2
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