Depreciation/Amortization/Depletion

What are the requirements for an asset to be classified as property and equipment?

Must have tangible physical substance be used longer than one year and generate revenue through operations not held for resale

Give examples of property and equipment.

Buildings machinery computers furniture fixtures equipment

What types of assets are excluded from property and equipment?

Land held for future use and buildings held for speculation

What is the reporting basis for property and equipment?

Historical cost

How is historical cost defined for property and equipment?

All normal and necessary expenditures to get the asset in condition and position for use in generating revenue

Give examples of capitalized costs for land.

Purchase price legal fees grading clearing

Give examples of capitalized costs for buildings.

Materials labor permits architect and engineer fees

Give examples of capitalized costs for equipment.

Purchase price shipping installation employee training

What principle requires allocating cost of long lived assets to expense?

Matching principle

What is the expense called when allocating cost of long lived assets?

Depreciation

What four variables determine annual depreciation expense?

Historical cost expected useful life residual value allocation pattern

How is depreciable base calculated?

Cost minus residual value

What is the straight line depreciation formula?

Depreciable base divided by expected useful life

Example calculation: $600000 building $30000 residual life 5 years.

Annual depreciation is $114000

What guidance allows any systematic and rational depreciation method?

Accounting Research Bulletin 43

What contra account is used to record depreciation?

Accumulated depreciation

Why use accumulated depreciation instead of reducing asset directly?

To show both original historical cost and total cost expensed to date

What is book value of an asset?

Historical cost minus accumulated depreciation