Methods of Depreciation and Impairments

This set of flashcards covers the key concepts of depreciation, impairment, and related accounting methods as discussed in the lecture notes.

What is the definition of depreciation in accounting?

Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

What are the three types of cost allocation for long-term assets?

Fixed assets use depreciation expense, intangibles use amortization expense, and natural resources use depletion expense.

What is the depreciable base in depreciation?

The depreciable base is calculated as the original cost of the asset minus its salvage value.

What factors can lead to the retirement of assets?

Companies can retire assets due to physical factors (such as casualty or expiration of physical life) or economic factors (such as inadequacy, supersession, and obsolescence).

Name three methods of depreciation.

Three methods of depreciation include the straight-line method, declining-balance method, and activity method.

What is the purpose of the recoverability test in impairments?

The recoverability test determines whether expected future net cash flows are less than the carrying amount of an asset to decide if an impairment has occurred.

What constitutes an impairment loss when an asset is held for disposal?

An impairment loss is calculated as the excess of carrying amount over fair value less the cost of disposal.

What does the term 'depletion' refer to in accounting?

Depletion refers to the process of allocating the cost of natural resources using methods like the units-of-production approach.

What are the two main features of natural resources?

Natural resources involve complete removal (consumption) of the asset and replacement only by an act of nature.

How should changes in depreciation estimates be handled?

Changes in depreciation estimates should be accounted for in the period of change and future periods, not retrospectively.