Depr. Basics
What is depreciation?
The allocation of the cost of a long-term asset over its useful life.
Name one reason depreciation must be revised?
Major upgrades to the asset (capital expenditures) or changing your mind about how long it will last.
Name one way to dispose of an asset?
Selling it, trading it for something else, or simply throwing it away (retirement).
What is depletion?
Spreading the cost of natural resources (like oil or timber) as they are used up.
What is a primary characteristic of an intangible asset?
It gives the company an advantage but you cannot physically touch it, like a patent.
Name one depreciation method
One method used to allocate depreciation, such as straight-line, declining-balance, or units-of-production.
Are revisions to depreciation applied retroactively?
No, you only change the math for the current year and future years.
What must you do immediately before recording a disposal?
Record the depreciation for the months you used it in the current year.
Which method is generally used to calculate depletion?
The units-of-production method.
How are intangible assets with indefinite lives treated?
They are not spread out over time (amortized).
What factors affect depreciation?
Cost, Useful life, and Residual value.
What happens after an impairment loss is recorded?
You must recalculate all future depreciation based on the new, lower value.
What is the formula to calculate a gain or loss on disposal?
The money you got (proceeds) minus the asset's value on your books (carrying amount).
Where is the annual depletion amount recorded first?
In an inventory account (a current asset).
What is amortization?
Spreading the cost of an intangible asset over its useful life.
What is the carrying amount?
The original cost of the asset minus all the depreciation recorded so far.
What is a capital expenditure?
Money spent on an asset that provides benefits for many years, like a major improvement.
When do you record a gain on disposal?
When you sell the asset for more than its carrying amount.
How is the depletion amount per unit calculated?
Take the cost (minus residual value) and divide it by the total estimated units available.
What does goodwill represent?
The value of a business's good reputation, great location, or skilled staff.
When does depreciation stop?
When the asset's value on the books reaches its final estimated value (residual value)
Calculate revised annual depreciation: Carrying amount is $11,200, revised residual is $700, remaining life is 3 years?
$3,500 per year.
Which components are removed in the journal entry for a disposal?
The asset's original cost and its total accumulated depreciation.
When is depletion transferred from the balance sheet to the income statement?
When the items are actually sold to a customer.
When is goodwill recorded in the accounting records?
Only when one company buys another entire company.