1. Distinguish among depreciation, depletion, and amortization expenses. Depreciation refers to the cost allocation of tangible long-term assets; depletion refers to the cost allocation of natural resources; and amortization refers to the cost allocation of intangible assets. All three terms have similar underlying principles governing their use. 2. What factors must be considered in determining the periodic deprecation charges that should be made for a company’s depreciable assets? Four separate factors must be considered in determining the periodic depreciation charges that should be made for a company’s assets.

There's a specialist from your university waiting to help you with that essay.
Tell us what you need to have done now!


order now

They are (1) asset cost, (2) residual or salvage value, (3) useful life, and (4) pattern of use. These factors, when considered together, help determine which of the common methods are most appropriate for the circumstances. 3. What role does residual, or salvage, and value play in the various methods of time-factor deprecation? Residual or salvage value is included in the formulas for all time-factor depreciation methods except for the declining-balance methods. In practice, residual value is often ignored if it is the practice of a company to retain assets for most of their useful lives.

In the case of declining-balance methods, although residual value is not included in the formulas, it is considered when an asset is near the end of its useful life. Generally, the book value should not be reduced below its expected residual value. 4. Distinguish between the functional and physical factors affecting the useful life of an tangible noncurrent operating assets. Functional factors include inadequacy and obsolescence that reduce the usefulness of the asset. Physical factors include wear and tear, deterioration and decay, and damage or destruction reducing the usefulness of the asset. 5.

Distinguish between time-factor and use-factor methods of depreciation. Time-factor methods of depreciation base cost allocation on time according to either straight-line or accelerated depreciation. In theory, the pattern selected should be related to the pattern of benefits expected from the asset. Because the pattern of benefits is very subjective, the selection of a specific time-factor method is usually an arbitrary decision. Use-factor methods of depreciation base cost allocation on some measure that relates more directly to the use of the asset. Most commonly, the allocation is based on productive output or service hours.

In theory, the use-factor methods provide a much better matching of costs against revenues than do time-factor methods. However, because use-factor methods require more extensive accounting records, they are not as common as the time-factor methods. 6. Briefly describe group deprecation, and describe how asset retirements are recorded under this method. With group depreciation, periodic depreciation expense is computed on a whole group of assets as if the group were one single asset. The weighted-average life of the group is used to determine how much of the aggregate asset cost should be depreciated each year.

No gains or losses are recognized at the time of the retirement of individual assets; accumulated depreciation is reduced for the difference between the asset cost and the cash retirement proceeds. 7. Describe the component approach to computing depreciation. Some items of property, plant, and equipment are composed of identifiable sub-items, or components, with substantially different useful lives or usage patterns. The component approach to depreciation is to depreciate each component, separately. The component approach is allowed in the United States and is required under IAS 16. . How does the recognition of an asset retirement obligation impact periodic depreciation expense? Interest expense? The amount of an asset retirement obligation is added to the cost of the associated asset. Accordingly, the asset retirement obligation increases periodic depreciation. In addition, the amount of the asset retirement obligation itself increases each year as the time until the obligation must be satisfied decreases. However, this increase, which conceptually is exactly the same as interest expense, is not accounted for as interest expense.

Instead, it is called accretion expense. 9. Describe the proper accounting treatment for a change in estimated useful life. When a useful-life estimate is changed, the remaining book value of the asset is depreciated over the revised remaining useful life. In other words, the estimate impacts only the current and future periods. No attempt is made to go back and “fix” the depreciation amount recognized in prior periods. 10. What procedures must be followed when the estimate of recoverable natural resources is changed due to subsequent development work?

When new estimates of recoverable natural resources are obtained, a new depletion cost per basic unit is computed from the beginning of the period in which the new estimate is made. No adjustment is made to prior periods. It is a change in estimate and therefore prospective in nature. 11. Under U. S. GAAP, what test is used to determine whether an asset is impaired? How is an impairment loss measured? A company should recognize an impairment loss when the undiscounted sum of expected future cash flows from the asset is less than the recorded book value of the asset. The impairment loss is measured as the difference etween the book value of the asset and the asset’s fair value.

Fair value can be estimated as the discounted sum of expected future cash flows. 12. How does the international accounting standard for asset impairment differ from the standard used in the United States? IAS 36 differs from U. S. GAAP in that the discounted sum of future cash flows, rather than the undiscounted sum, is used to determine whether an impairment loss exists. 13. If a non-US company chooses to revalue a long-term operating asset upward in accordance with IAS 16, how is the unrealized “gain” on the revaluation recognized in the financial statements?

If a non-U. S. company chooses to revalue a long-term operating asset upward in accordance with IFRS 16, the unrealized “gain” on the revaluation is recognized as a revaluation equity reserve. This equity reserve increases the reported amount of equity but is not shown as a gain in the income statement. 14. Briefly describe the three types of intangible assets in terms of amortization and impairment. For accounting purposes, recorded intangible assets come in three varieties: a. Intangible assets that are amortized. The impairment test for these intangibles is the same as the two-step test used for tangible long-term operating assets. . Intangible assets that are not amortized. The impairment test for these intangibles involves a simple one-step comparison of the book value to the fair value. c. Goodwill, which is not amortized. The goodwill impairment test is a two-step process that first involves estimating the fair value of the entire reporting unit to which the goodwill is allocated. 15. Briefly describe the four procedures followed in testing goodwill for impairment. a. Compute the fair value of each reporting unit to which goodwill has been assigned. b.

If the fair value of the reporting unit exceeds the net book value of the assets and liabilities of the reporting unit, the goodwill is assumed to not be impaired and no impairment loss is recognized. c. If the fair value of the reporting unit is less than the net book value of the assets and liabilities of the reporting unit, a new fair value of goodwill is computed. The goodwill value is the amount of fair value of a reporting unit that is left over after the values of all identifiable assets and liabilities of the reporting unit have been considered. c.

If the implied amount of goodwill computed in (c) is less than the amount initially recorded, a goodwill impairment loss is recognized for the difference. 16. Under IAS 36, there is basically one impairment test for intangelble assets. Briefly describe the structure of that test. Under IAS 36, the general structure of the impairment test for intangible assets is that the recorded amount of the intangible asset is compared to its “recoverable amount. ” 17. What two unusual accounting actions are taken when a long-term operating assets is classified as held for sale? a. No depreciation is to be recognized. . The asset is to be reported at the lower of its book value or its fair value (less the estimated cost to sell. 18. Under what circumstances is a gain recognized when a productive asset is exchanged for a similar productive asset? A loss? A gain or loss is recognized whenever an exchange of assets takes place unless the following four conditions exist: (1) the assets are similar in nature, (2) the parties to the transaction are in the same line of business, (3) a gain is indicated in the transaction, and (4) if cash is involved, it is less than 25% of the fair value of the exchange.

The APB concluded that if these conditions exist, any indicated gain should be deferred and recognized over the life of the new asset. If less than 25% cash is received as part of the consideration in the exchange, a portion of any indicated gain may be recognized even if all four conditions exist. An indicated loss is always recognized. 19. Why isn’t depreciation expense always computed for the exact number of days an asset is owned? Depreciation is an estimate, and the effort necessary to compute depreciation expense for the exact number of days an asset is owned usually exceeds any benefit derived.

For companies that acquire and dispose of many assets during a year, detailed tracking of daily depreciation is almost impossible. A variety of simplifying assumptions are used, including rounding to the nearest whole month and the half-year convention in which one-half of a year’s depreciation is taken on any asset acquired or disposed of during the year. 20. What were the original reasons for the development of the ACRS income tax depreciation method?

The original reasons for the development of the ACRS income tax depreciation method were simplification of the tax depreciation computations and acceleration of tax depreciation deductions to reduce income taxes and stimulate investment. Simplification comes through the grouping of assets in just a few classes and through the ignoring of salvage values. Acceleration of tax depreciation deductions comes through shortened asset lives and use of accelerated depreciation methods like double-declining-balance.

Leave a Reply

Your email address will not be published. Required fields are marked *