Depreciation & Long-Term Assets
What are the four main methods of depreciation?
Straight-line, Double-Declining Balance, Units-of-Production, and Sum-of-the-Years’-Digits.
What are the steps for recording a sale of a plant asset?
Remove the asset and accumulated depreciation, record cash received, and record any gain or loss.
Name three common categories of intangible assets.
Marketing-related, Contract-based, and Technology-based.
What is the term used for allocating the cost of natural resources?
Depletion.
What are the two main types of securities?
Debt and Equity.
Under the straight-line method, what is the depreciation formula?
(Cost – Salvage Value) ÷ Useful Life.
How do you determine gain or loss on sale?
Compare sale proceeds with the asset’s book value.
What is goodwill?
The excess of purchase price over the fair market value of identifiable net assets acquired.
Formula for depletion rate per unit?
(Cost – Salvage Value) ÷ Total Estimated Units.
How are trading debt securities reported?
At fair value, with unrealized gains/losses on the income statement.
What happens to depreciation expense in accelerated methods compared to straight-line?
Expense is higher in early years and lower in later years.
What account is debited when an asset is impaired?
Loss on Impairment.
When are intangible assets amortized?
Only when they have finite useful lives.
How do you calculate depletion expense for a year?
Depletion rate × Units Extracted.
What ownership percentage typically indicates significant influence?
Between 20% and 50%.
When an asset is purchased mid-year, how is depreciation adjusted?
Multiply the annual depreciation by the fraction of the year the asset was used.
What signals that an asset may be impaired?
Events such as declining performance, technological changes, or relocation decisions.
What is the journal entry to record amortization expense?
Debit Amortization Expense; Credit the related intangible asset (e.g., Patent).
When estimates change (like additional resources found), what should be updated?
The depletion rate per unit based on new total recoverable units and revised salvage value.
Under the equity method, how does receiving dividends affect the investment account?
It decreases the investment account.
If useful life is revised, what do you use to compute new depreciation?
(Book Value – New Salvage Value) ÷ Remaining Useful Life.
What is the formula to test for impairment?
Compare the asset’s book value to its expected future cash flows—if BV > recoverable amount, record an impairment loss.
How is internally developed goodwill treated under GAAP?
It cannot be recorded as an asset; only acquired goodwill can be recognized.
What type of account is Accumulated Depletion?
A contra-asset account to the related natural resource.
Under which method are unrealized gains and losses reported in other comprehensive income (OCI)?
Available-for-Sale (AFS) debt securities.