Depreciation + PPE Chapter 13

Asset costs

Contract price, freight, assembly, testing, anything associated with getting the product in operating condition

What is the formula for depreciation base?

Asset cost- residual value

What is sum of the years digits method?

Base * fraction (5/5+4+3+2+1), next is base (4/14)

What is double depreciation method

Say its 1/5 for straight line, then the rate is .40 and you * the base,

So .40 ×200-50k=150k base

How do companies report accumulated depreciation under GAAP and IFRS?

They may combine all the accumulated depreciation and report only the total at a minimal disclosure for GAAP, but IFRS requires disclosure of all accumulated depreciation and not just the total amount

What can manufacturing companies do for including depreciation expense?

Include as part of manufacturing overhead, which increases work in process inventory account

What is group depreciation?

Homogeneous assets with similar service and residual values

What is composite depreciation?

Heterogenous assets that are related but have differing service lives and residual values

What is the formula for group depreciation?

((Group cost-group residual value)/average life of group assets) / group cost

Under IFRS and GAAP, how is component depreciation used?

Under IFRS, component depreciation requires individual components of an asset to be depreciated individually, and under GAAP its also allowed but rarely used but rather than the total

What is the nearest whole month convention?

Assets placed in service on or before the 15th are not depreciated until the next month

Assets sold on on or before the 15th = depreciated for the month

What is nearest whole year convention

Placed in service after 6 months or disposed of in 1st 6 months = not depreciated for the year

Placed in service in first 6 months or disposed of after 6 months = depreciation for the entire year

One half year convention

All assets sold or placed in service during the year are considered to have been placed in service or sold during mid point, which means ½ years depreciation expense in year of acquisition and ½ in disposal

What is accretion expense?

Increase in present value pf asset retirement obligation due to passage of time

• Debit accretion expense

  • Credit asset retirement obligation

What is impairment?

Future economic benefit decreases below book value

• if FV of PPE < BV = prior earnings overstated =recognize loss

• if FV of PPE > BV = future profits overstated

How does GAAP and IFRS handle impairment?

GAAP does not require annual impairment testing but IFRS does

Where does GAAP and IFRS report impairment?

Under IFRS it can be reported on OCI if impairment is recovered, whereas GAAP its reported on IS and cannot be reversed

If an asset is held for sale, can you depreciate it?

No you cannot

What is depletion?

allocation of cost of a natural resources to which the periods in which benefits are received

What is the entry for which a prior period depreciation where salvage value wasnt accounted for?

Accumulated depreciation

• retained earnings

Depreciation expense

• accumulated depreciation