ACC 131 Seipp Week 11 Lecture Notes: 10/26-10/30
ACC 131 Seipp Week 11 Lecture Notes: 10/26-10/30 ACC 131
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This 4 page Class Notes was uploaded by Daniel Hemenway on Thursday October 29, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Summer 2015. Since its upload, it has received 20 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 10/29/15
ACC 131 Seipp 10261030 StraightLine Method Straightline depreciation method allocates an equal amount of an asset s cost to depreciation expense for each year of the asset s useful life It is appropriate to apply this method to those assets for which an equal amount of service potential is considered to be used each period It is most used because it is simple to apply and is based on a pattern of service potential decline that is reasonable for many fixed assets Straightline depreciation rate 1 useful life years Annual straightline depreciation depreciable base useful life Annual straightline depreciation depreciable base x Straight line rate Depreciable base Cost Residual Value Declining Balance Method Declining Balance Method an accelerated depreciation method that produces a declining amount of depreciation expense each period by multiplying the declining book value of an asset by a constant depreciation rate It results in a larger amount of depreciation expense in the early years of an asset s life relative to the straightline method Double declining balance twice the SL Rate depends on multiplier m Declining Balance Rate m x SL Rate Depreciation expense for each period of an asset s useful life equals the declining balance rate times the asset s book value cost less accumulated depreciation at the beginning of the period as shown Declining Balance Depreciation Expense Declining Balance Rate x Book Value Annual Depreciation BV x DB Rate UnitsofProduction Method When the decline in an asset s service potential is proportional to the usage of the asset and asset usage can be measured depreciation expense can be computed using the unitsofproduction method Usage is typically gauged by a measure of productive capacity Depreciation Cost per Unit Depreciable Base Estimated Units Next the depreciation cost per unit is multiplied by the actual usage of the asset UnitsofProduction Depreciation Expense Depreciation Cost per Unit x Actual Usage of the Asset ACC 131 Seipp 10261030 Choosing Between Depreciation Methods The three depreciation methods can be summarized as follows The straightline depreciation method produces a constant amount of depreciation expense in each period of the asset s life and is consistent with a constant rate of decline in service potential The declining balance depreciation method accelerates the assignment of an asset s cost to depreciation expense by allocating a larger amount of cost to the early years of an asset s life This is consistent with a decreasing rate of decline in service potential and a decreasing amount for depreciation expense The unitsofproduction depreciation method is based on a measure of the asset s use in each period and the periodic depreciation expense rises and falls with the asset s use In this sense the unitsofproduction depreciation method is based not on a standardized pattern of declining service potential but on a pattern tailored to the individual asset and its use Depreciation for Partial Years The asset is purchased or disposed of during the accounting period the matching principle requires that depreciation be recorded only for the portion of the year that the asset was used to generate revenue Depreciation and Income Taxes Tax depreciation rules are designed to stimulate investment in operating assets and therefore are not guided by the matching concept Most companies use the Modified Accelerated Cost Recovery System MACRS to compute depreciation expense for their tax returns which is similar to the declining balance method MACRS is not acceptable for financial reporting purposes Expenditures after Acquisition In addition to expenditures made when property plant and equipment is purchased companies incur costs over the life of the asset that range from ordinary repairs and maintenance to major overhauls additions and improvements Companies must decide whether these expenditures should be capitalized added to an asset account or expensed reported in total on the income statement ACC 131 Seipp 10261030 Intangible Assets Intangible operating assets like tangible assets represent future economic benefit to the company but unlike tangible assets they lack physical substance Patents copyrights trademarks leaseholds organization costs franchises and goodwill The economic benefits associated with most intangible assets are in the form of legal rights and privileges conferred on the owner of the asset The economic value of a patent for example is the legal right to restrict control or charge for the use of the idea or process covered by the patent Accounting for Intangible Assets Intangible assets are recorded at cost consistent with the historical cost principle The cost of an intangible asset is any expenditure necessary to acquire the asset and to prepare the asset for use For intangible assets purchased from outside the company the primary element of the cost is the purchase price For internally developed intangible assets the cost of developing the asset is expensed as incurred and normally recorded as research and development RampD expense 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 This process is referred to as amortization If intangibles have indefinite lives they are instead reviewed at least annually for impairment Natural Resources Natural resources such as coal deposits oil reserves and mineral deposits make up an important part of the operating assets for many companies Like intangible assets natural resources present difficult estimation and measurement problems However natural resources differ from other operating assets in two important ways Unlike fixed assets natural resources are physically consumed as they are used by a company Natural resources can generally be replaced or restored only by an act of nature ACC 131 Seipp 10261030 Depletion As a natural resource is removed from the earth the cost of the natural resource is allocated to each unit of natural resource removed This process of allocating the cost of the natural resource to each period in which the resource is used is called depletion Depletion is computed by using a procedure similar to that for the unitsof production method of depreciation First a depletion rate is computed as follows Depletion Rate Cost Residual Value Recoverable Units Second depletion is calculated by multiplying the depletion rate by the number of units of the natural resource recovered during the period Depletion Depletion Rate x Units Recovered Cost of Tangible Assets in Connection with Natural Resources Companies will often incur costs for tangible fixed assets in connection with the use of a natural resource such as buildings equipment roads to access the resource