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Int. Acct. I
Ch. 10: Depreciation, Impairments, and Depletion
| Term | Definition |
|---|---|
| depreciation | the process of allocating the cost of tangible assets to expense in a rational and systematic manner over the periods of use. It is not a process of valuation |
| book value | how much of the tangible assets cost; cost-accumulated depreciation |
| depletion | Cost allocation of natural resources (such as timber, gravel, oil, and coal). |
| amortization | Cost allocation of intangible assets (such as patents and copyrights). |
| salvage value (disposal value) | the estimated amount that a company will receive when it sells the asset or removes it from service |
| activity method | also called the variable-charge or units-of-production approach) assumes that depreciation is a function of use or productivity, instead of the passage of time. |
| straight-line method | considers depreciation as a function of time rather than a function of usage |
| decreasing-charge method | provide for a higher depreciation expense in the earlier years and lower expense in later years |
| sum-of-the-years'-digits method | results in a decreasing depreciation expense based on a decreasing fraction of the depreciable base (original cost less salvage value) |
| declining balance method | determines depreciation expense by applying a constant percentage to the declining book value of the asset each year; this method does not deduct the salvage value in computing depreciation expense |
| group method | type of depreciation on a mass basis |
| composite method | like the group method; assets are larger in value and often contain numerous components |
| revision of estimates | a change in estimate of salvage value or useful life are shown in current and future periods; remaining net book value - new estimated salvage value/remaining useful life |
| impairment | occurs when the expected future net cash flows (undiscounted) of an asset is less than the asset's carrying value; the write-off of all or part of the carrying value of property, plant, and equipment |
| depletion | used to account for natural resources which are physically consumed over the period of use, such as petroleum, minerals, and timber |
| natural resources | petroleum, minerals, and timber, are used in a company’s operations |
| acquisition costs | costs to acquire the asset or rights to use it (all costs are capitalized) |
| exploration costs | costs to locate the resource |
| development costs | costs to remove/extract the resource |
| tangible equipment/material costs | transportation and other heavy equipment are needed to extract the resource and get it ready for the market |
| intangible costs | drilling costs, tunnels, shafts, and wells |
| restoration costs | costs to restore the asset to a sellable condition at the end of its useful life |
| cost allocation | once the depletion base is established, the company will decide how to allocate the cost to the periods benefitted. Usually, the Units of Production method is used. |
| cost depletion | allocating the costs toward the depletion based in the periods benefitted |
| full-cost concept | the cost of drilling a dry hole is a cost needed to find the commercially profitable wells |
Created by:
ryanriggs18
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