Asset Depreciation Methods Quiz Chapter 9

Chapter 9: Long-Lived Assets

• This chapter covers long-lived assets, including property, plant, equipment, natural resources, and intangible assets.
• Learning goals include distinguishing capital from revenue expenditures, recording transactions related to amortization, disposal, and depletion of tangible assets, identifying elements for determining plant and equipment costs, natural resources and intangibles, and recording transactions for intangible assets.
• Success criteria include determining costs of property, plant & equipment, explaining & calculating depreciation, accounting for disposal of property, plant & equipment, calculating & recording depreciation of natural resources and identifying intangible asset & goodwill accounting issues.

Property, Plant, and Equipment

• Long-lived assets owned by a company; used in production and sale of goods and services.
• Characteristics:
  • Have physical substance (size and shape)
  • Used in business operations.
  • Not intended for sale to customers.
• Expected to provide services for several years.
• Divided into four classes: land, land improvements, buildings, and equipment.

Determining Cost

• Cost includes purchase price, non-recoverable taxes, less discounts, and rebates.
• Includes all costs necessary to bring the asset to its location and ready-for-use condition, including obligations to remove or restore the asset upon retirement.
• Capital expenditures benefit future periods; operating expenditures benefit only the current period.

Land and Improvements

• Land cost includes the purchase price, closing costs (e.g., legal fees, surveys), and costs to prepare the land for intended use.
• Land improvements are additions to land (e.g., fences, parking lots, landscaping); they have limited useful lives and are separately recorded and depreciated.

Buildings

• Building costs include purchase price, closing costs, and costs to get the building ready for its intended use (e.g., renovations, repairs).
• Construction costs include contract price, architects' fees, building permits, construction interest, and excavation costs.

Equipment

• Equipment includes delivery equipment, office equipment, computers, machinery, vehicles, furniture, fixtures, and other similar assets.
• The cost includes the purchase price, freight, insurance during transit, and assembly, installation, and testing costs.

Multiple Assets

• If multiple assets are purchased together for a single price, the total cost is allocated to each asset in proportion to its relative fair value. This method is called a basket purchase.

Depreciation

• Systematic allocation of the cost of a long-lived asset over its useful life.
• It's a process of cost allocation (not determining fair value).
• It does not accumulate cash for replacement.

Calculating Depreciation

• To calculate depreciation, determine:
  • The cost to acquire the asset and prepare it for use.
  • The estimated useful (productive) life of the asset (expressed as time, units of activity, or units of output).
  • The estimated residual value (value at the end of its useful life).

Depreciation Methods

• Three depreciation methods to choose from:
  • Straight-line
  • Diminishing-balance
  • Units-of-production

Straight-Line Method

• Depreciation expense is constant each year of the asset's useful life.
• Depreciable amount is calculated by subtracting the residual value from the cost.
• Annual depreciation expense is calculated by dividing the depreciable amount by the estimated useful life.

Diminishing-Balance Method

• Depreciation expense is based on the asset's diminishing carrying amount (cost less accumulated depreciation).
• The depreciation rate remains constant, but depreciation expense declines each year.

Units-of-Production Method

• Useful life is expressed as total units of production or activity.
• The total estimated units of production are used to determine the depreciation cost per unit.
• Annual depreciation expense is calculated by multiplying the depreciable amount per unit by the units of production during the year.

Natural Resources

• Natural resources (wasting assets) include standing timber, oil, gas, and minerals.
• They differ from other long-lived assets because they are physically extracted, depleted, and replaced only by nature.
• The cost of natural resources includes costs to acquire, prepare, and use them while future restoration/clean-up costs are added.
• Depreciation is calculated using the units-of-production method and debited to inventory.
• The cost is expensed when the product is sold.

Intangible Assets

• Intangible assets represent rights, privileges, and competitive advantages without physical substance, like patents, copyrights, trademarks, franchises, and licenses.
• Recorded at cost (including costs to prepare an asset for use).
• Amortized (depreciated) over their finite useful or legal life, whichever is shorter, and this often uses the straight-line method.
• Assets with indefinite lives are not amortized.

Goodwill

• Goodwill represents the value of favorable attributes of a company acquired in a business purchase; it's recorded when a business is acquired.