ACCT321 Delaney Fall 2025 Chapter 10/11 test 4

Depreciation definition

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

Factors in depreciation process

• Depreciable Base

• Asset’s useful life

• Physical vs. Economic Factors

Depreciable Base calculation

Cost

less: Salvage Value

Straight-Line Method

(Cost - salvage value) divded by #of years of useful life

= Depreciation Expense

Sum of Year’s Digits Method

n(N+1) = Denominator

2

Numerator = starting with # of end year,

Fraction x cost(do not subtract out salvage value)

Declining Balance Method

Use straight line rate

If double-declining, then double

then x by rate by beginning of year value = Depreciation Expense

Keep doing so for each year

Units of Activity Method

Cost - Salvage Value. . x Actual units = Depreciation Expense

of estimated units of activity

Composite rate

(Straight line depreciation Expense for that asset category)

Original cost

Composite Life

Depreciation per year(Total of all asset dep that year).    =

Total depreciable cost

Change in Estimate

Step 1: Find new Book value by subtracting amount already depreciated by how many years its been already minus salvage value

Book Value

Less: OG salvage value

Depreciable Base divided by

OG useful life

Annual Depreciation x # of years gone by

On B.S.

Asset

less: amount already depreciated

Net book value

Step 2

Net book value

less: New salvage value 

New Depreciable Base divided by New # of years of useful life = Depreciation Expense per yea

Book Value

Cost

less: Accumulated Depreciation

Recoverability Test for Impairments of PPE

FCF > Carrying(Book value) —> No impairment

FCF < Carrying value —> Impairment

Fair Value if impairment for Limited-life intangibles

Carrying value - fair value of asset

Fair Value Test for indefinite life intangibles

Carrying value < Fair Value —>No impairment

Carrying value > Fair Value —> Impairment

Depletion definition

Like depreciation but for land resources

Depletion costing - what to include?

• Acquisition cost(price paid to acquire rights to search, price paid for already discovered resourced, leases, royalties)

• Exploration cost(drilling) - some expense rigth aways others capitalize then deplete

• Development costs

Development costs definition

(1)  Tangible equipment that can be moved typically depreciated separately (e.g. drilling rig) – do not include in the depletion base

(2)  Tangible equipment that can’t be moved (e.g. drilling rig foundation) depreciate over useful life or life of the resource whichever is shorter – do not include in the depletion base

(3)  Intangible costs (drilling costs, tunnels, shafts, and wells) – considered part of the depletion base

Restoration Costs

costs to return property to natural state after extraction has occurred – considered part of the depletion base

Units of Activity method for depletion

   (Total Cost - Salvage Value).     

     Total est. units available

= Depletion cost per unit

Amortization of Limited-Life intangible

Straight-line method

Test for impairment using recoverability test + fair value test

Amortization of Indefinite-Life intangible

Do not amortize

Test for impairment annually with fair value test only

Types of Indefinite Life Intangibles

• Marketing-related(TM, internet domain names

• Contract-related(can be both, franchsies)

• Crypto-related*

*Recorded at fair value and changes in fair value are recorded as an unrealized gain or loss as part of net income.

Types of Limited Life Intangibles

• Customer-related(Customer lists, orders)

  • TM renewable every 10 yrs

• Artistic-related(copyright)life of creator 70 years

  • capitalize cost of acquiring and defending

• Contract-related(can be both, franchises)

• Technology-related(patent 20yrs)

  • amortize over legal life or useful life whichever is shorter

  • Unrecovered Legal costs to defend 

Marketing-related

• Capitalize acquisition costs

• Do not amortize

Customer related (Customer lists, orders)

• Capitalize acquisition costs

• Amortize to expense over useful life

Artistic related(copyright)

• Life of creator + 70 years

• Capitalize acquisition amd defense

Contract related(Franchise)

• Annual payments to franchise are expenses to franchisee

• License or permits granted by go

Technology-related(patent)

• 20 yrs

• Can be product or process related

• Amortize over legal life or useful life, whichever is shorter

• Unrecovered legal fees to acquire and defend patents are capitalized and amortized

• Can’t renew

Crypto related(BitCoin)

• Advantages

  • Provides privacy for owners who do not want to use traditional financial institutions

  • Can be used for investment purposes or for transaction purposes

  • Often lowers transaction costs when conducting business in international markets

  • Offers diversification benefits for investment portfolios

• Recorded at fair value and changes in fair value are recorded as an unrealized gain or loss as part of net income.

• Do not test for impairment since both holding gains and losses are recorded

• Criticism of cryptocurrencies

  • Viewed by many as having no intrinsic value.  Skeptics note that crypto pays no dividends, has no earnings, and no cash flow.  So, how can it have value—it’s only value involves convincing someone else to buy it at a higher price (the greater fool theory).

Goodwill calculation

Fair value of net tangibles ad net intangibles vs, selling price = $$ of goodwill

Recording goodwill

-Goodwill generated internal should not be recorded

-R&D are internal

-End up as an asset debit

Goodwill write-off

-Do not amortize goodwill due to indefinite life

-Instead test for impairment and record that

Impairment of goodwill calculation

Carrying value of company > fair value of net assets