Chapter 12: Depreciation, Impairments, and Depletion

What is depreciation in accounting?

Depreciation is the allocation of acquisition cost of a fixed asset to expense over its estimated useful life.

What formula is used to calculate straight-line depreciation?

(Acquisition cost - Residual value) / Estimated useful life in years

What does the declining balance method of depreciation assume?

It assumes that a fixed asset declines in usefulness at a constant rate.

In the units-of-production method, how is depreciation expense calculated?

Annual depreciation expense = Depreciation rate per unit of output * Actual units of output.

What is the difference between group depreciation and composite depreciation?

Group depreciation is used for homogeneous assets; composite depreciation is used for heterogeneous assets.

What is recognized when an asset is impaired?

If the recoverable cost is less than the carrying value, an impairment loss is recorded.

What are the conditions for an asset to be classified as held for sale?

Management is committed to sell, the asset is available for immediate sale, and significant changes to the plan are unlikely.

What is the journal entry to record an impairment loss?

Debit Loss on Impairment; Credit Accumulated Depreciation.

What disclosures are required for property, plant, and equipment?

Depreciation expense, balances of major classes of depreciable assets, and a description of depreciation methods used.

What is the depletion rate per unit for natural resources?

Depletion base / Estimated activity base in units.

What is the successful-efforts method in oil and gas exploration?

It capitalizes only the exploration costs of successful wells and expenses the costs of unsuccessful wells.

What are restoration costs?

Costs to restore property to its original condition after the extraction of a natural resource.

How is accumulated depreciation recorded for disposals?

No gain or loss is recorded; debit cash for proceeds, credit fixed assets for original cost, and debit accumulated depreciation.

How should a change in estimate for depreciation be treated?

It should be handled prospectively, with no changes to prior reporting unless material.

What is a full-cost method in oil and gas exploration?

All exploration costs are capitalized if the estimated value of reserves from successful wells justifies the costs.

Depreciation per unit of output (input)

Depreciable cost / estimated productive output (input) in units

annual declining-balance depreciation

book value at beginning* depreciation rate

annual declining-balance depreciation rate

2*(1/n)

Composite annual depreciation rate

annual group straight-line depreciation / total group acquisition cost

composite group useful life

total group depreciable cost / annual group straight-line depreciation

Composite group useful life

Composite annual depreciation*total group acquisition cost

total group depreciable cost

total group acquisition cost*total residual value

Asset is impaired if expected cash flows are:

less than book value

Impairment loss=

Asset carrying value - Asset fair value

The new carrying value is the lower of

carrying value before adjustments or fair value less cost to sell

depletion base

capitalized cost less residual value

depletion rate per unit of output

depletion base / estimated activity base in units

annual depletion

depletion rate*actual activity base in units