Assets that have an expected useful life in excess of one year

Note: Under the matching principle the cost of acquiring the fixed asset should be allocated over time (not expensed entirely in the period the transaction happens)

An estimate of how long the fixed asset will remain in use in the production process

Potential methods:

1. You could compare the historical experience of similar assets
2. You could extrapolate in general terms about the expected useful life of categories of assets (e.g. buildings)

A contra (asset) account where an entity keeps track of the depreciation expense that accumulates with respect to a fixed asset over time

Note: it is used instead of making a right side entry to match "depreciation expense."  See p. 97.

Adjustments made to an entity's financial statements when they discover that one or more of the judgments required for the depreciation exercise was materially incorrect

Notes:

• The prior financial statements are NOT restated
• Make the adjustments and disclose them in the footnotes

The test is whether the fixed asset's book value exceeds the amount of gross future cash flows the asset is expected to generate

Note: the effects of a mid-course impairment are recognized in current income and cannot be reversed

What is the Straight Line Method (of depreciation)?

How do you calculate it?

Allocating the net cost of a fixed asset evenly over its expected useful life.

[Cost minus scrap value] divided by useful life.

What is the Sum of the Years' Digits Method (of depreciation)?

How is it calculated?

 Each year’s depreciation expense is a varying fraction. The fraction in earlier years is greater than under “straight line” fraction.

Determined by summing the years’ digits (Ex: if expected useful life is 5 years, 5+4+3+2+1=15)

Here, 15 is the numerator for each year and the denominator is the next year in line

(Ex: year 1: 5/15, year 2: 4/15, etc.)

Depreciable base is simply the historical cost (scrap value isn't subtracted) and the asset depreciates by double the percentage that applies under the straight line method (depreciation expense will be smaller each month)

Note: the depreciation cannot go below the scrap value

Depreciation Expense is:

a) a cash expense      

b) a non-cash expense

True.

Straight-line is usually chosen for financial reporting.

Accelerated methods are usually chosen for tax.

Depletion

No.

Note:

• Straight line method usually chosen for financial reporting
• Accelerated methods usually chosen for tax purposes

A depreciation schedule that treats all property acquired during the year as being acquired exactly in middleof the year.

Note: This means that only half of the full-year depreciation is allowed in the first year, with the remaining balance being deducted in the final year of the depreciation schedule, or the year that the property is sold.

Increases in equity generally from nonowner sources, which result from peripheral or incidental transactions.

Basically: An account used instead of a "revenue" account to show profit made outside of the financial operations of a business (like gains on sale)

Decreases in equity generally from nonowner sources, which result from peripheral or incidental transactions.

Basically : An account used instead of an "expenses" account to show losses suffered outside of the financial operations of a business (like losses on sale)

True.

Note: The reverse is permitted (accelerated to straight line)