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Test 4 Study Guide

by: Callisa Ruschmeyer

Test 4 Study Guide ACCT 2110 - 002

Callisa Ruschmeyer
GPA 4.0

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About this Document

Chapter 7 Operating Assets Depreciation Methods -Straight-Line Method -Double Declining Balance -Units-of-Production Depreciation and Income Taxes Expenditures after Acquisition Revision of...
Principles of Financial Accounting
Elizabeth G Miller
Study Guide
Financial Accounting; Miller; Auburn University; Chapter 7; Operating Assets and Depreciation Methods
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This 3 page Study Guide was uploaded by Callisa Ruschmeyer on Wednesday April 6, 2016. The Study Guide belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 43 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.


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Date Created: 04/06/16
Test 4 Test Review Formulas for Chapter 7  Book Value = cost - accumulated depreciation  Depreciation Cost = cost - residual value  Straight-line depreciation = (cost - residual value) / expected useful life  Straight-line depreciation rate = 100% / expected useful life (in years)  Double-Declining Balance rate = 2 X Straight-Line Rate o Straight-Line Rate = 100% / Estimated Life in Years  Declining Balance Depreciation Expense = Declining Balance Rate X Book Value  Depreciation Cost per Unit = (cost-residual value) / expected usage  Units-of-Production Depreciation Expense = Depreciation Cost per Unit X Actual Usage  Depletion Rate = (Cost - Residual Value) / Recoverable Units  Depletion = Depletion Rate X Units Recovered Operating Assets  Three categories 1. Property, plant, and equipment  Land is not subject to depreciation; land improvements are subject to depreciation  Buildings and equipment depreciate 2. Intangible assets 3. Natural resources  The cost of an operating asset is recorded as the cost of the actual asset and the costs of preparing the asset for use  Matching Principle applies when recorded depreciation o Record depreciation when it occurs  Capitalized vs. Expensed o Capitalize- when expenditure is included as part of the cost of the asset o Expensed- when expenditure is not included as part of the cost of the asset Depreciation  Reported on the income statement each period  Accumulated depreciation- total amount of depreciation expense (since the asset was acquired) o Reported on the balance sheet o Accumulated depreciation is a contra asset o Book value is the cost minus the accumulated depreciation  To find depreciation you need: the cost of the fixed asset, the expected life of it, and the residual value (salvage value)  Three methods to depreciation o Straight-Line: equal amount of depreciation expense for each year of the asset's life o Double Declining Balance: depreciation expense each period is computed by multiplying the declining book value by a constant depreciation rate  Rate = 100% / useful years o Units-of-Production: depreciation is proportional to the usage of the asset; therefore, depreciation fluctuates form year to year (or, period to period)  Comparison of Depreciation Methods o Double Declining Balance- double the percent of [(cost-residual values)/useful life]  Straight-line just uses the depreciation cost divided by the useful life o Remember, both use the depreciation cost = cost - residual value o Straight-line and Declining Balance consider years; Units-of-Production considers usage in units  Partial Year Depreciation- only affects the Straight-line and double declining balance methods o Must look at when the asset was first acquired and adjust the depreciation on that Expenditures after Acquisition  Capitalized- added to an asset; makes PPE more useful or productive and extends the life of the asset  Revenue- does not increase the future benefit of an asset; usually just maintains the level of benefits the asset is already provided; usually just routine maintenance expenses Revision of Depreciation  Two steps are performed to revise depreciation expense 1. Obtain the book value of the asset at the date of the revision of depreciation 2. Compute depreciation expense using the revised amounts for book value, useful life, and/or residual value Disposal of Fixed Assets  Voluntary disposal- the company decides that the asset is no longer useful  Involuntary disposal- the asset is lsot or destroyed  Two journal entries needed for disposal of fixed assets 1. Record depreciation expense up to the date of disposal  Debit- Depreciation Expense  Credit- Accumulated Depreciation 2. Remove the asset's book value and record the gain or loss form disposal  Debit- Cash and Accumulated Depreciation  Credit- Machine (at book value)  Also, debit if you incur an expense from selling (sell for less than it is worth) or credit a revenue from selling (sell for more than it is worth)  Either-or situation: cannot have both an expense and revenue Intangible Assets  Trademarks, patents, copyrights, trademarks, leaseholds, organization costs, franchises and goodwill  Lack physical substance  Represent future economic benefit to a company  Intangible assets are recorded at cost due to the historical cost principle  Amortization- the cost of an intangible asset with a finite life is allocated to accounting periods over the life of the asset to reflect the decline in service potential Natural Resources  Physically consumed as they are used by a company  Nature can only replenish natural resources  As a natural resource is removed from the earth, the cost of the natural resource is allocated to each unit of natural resource removed o This is known as depletion Impairment of Property, Plant, and Equipment  Impairment - permanent decline in the future benefit or service potential of an asset  Always be conservative- if a fixed asset is impaired, a company should reduce the asset's book value to its fair value in the year the impairment occurs


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