# Depreciation

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Depreciation Accounting

1

Types of Long-Lived Assets

Tangible asset
• Asset with physical substance • Property, plant, and equipment = fixed asset.

Intangible asset
• Intellectual property. • No physical substance
• Examples are patent rights, copyrights
2

Amortization

View capital asset as bundle of services • Similar to prepaid expenses, cost is expensed as company benefits from the services
• • • • Land - no depreciation Plant and equipment - depreciation Natural resources - depletion Intangible assets - amortization
3

Depreciation Methods
• •

Straight line method
• (original cost - residual value) /service life

Accelerated methods
• Declining balance methods • Sum of the years’ or years’ digits methods

4

Declining Balance Method

Depreciation = book value * depreciation rate.
• Double declining balance method = book value * 2 * straight line rate. • Straight line rate = 1/(life of asset in years).

5

Impaired Assets

• •

An asset for which its remaining benefits, as measured by the sum of future cash flows the asset’s use will generate, is less than its book value If entity expects to hold asset
• Write asset down to fair value

If entity expects to sell asset
• Write asset down to lower of cost or fair value less cost of disposal.
6

Group Depreciation n Group depreciation
• Treats all similar assets as a “pool” or group rather than calculating for each item separately. • No gain or loss recognized when an individual item is disposed.
– Credit asset account for original cost. – Debit cash for amount of proceeds. – Debit accumulated depreciation for difference.

n

Accumulated depreciation
• Does not represent the accumulation of any tangible thing. • Sum of the original cost that has been expensed. • Funding the purchase of new assets is usually unrelated 7 to...

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