ACC 231 Lecture Notes - Lecture 16: Food Truck, Natural Disaster
ACC 231- Lecture 16
Long Term Assets Continued
Best allocation method:
● —Choose an allocation method that mimics the nature of the asset
● —Straight line if service provided evenly over time (building)
● —Units of production if service provided is a function of usage (aircraft, trucks)
● —Declining balance if operating efficiency declines over time (machinery that wears out)
● —More than 90% of firms use straight line or straight line in combination with another
method
● —Choice of allocation method has no impact on taxes
● —Depreciation-tangible assets, Depletion-natural resources, Amortization-intangible
assets.
Example:
—On January 1st, The Taco Shack purchased a food truck for $125,000 with an estimated useful
life of 10 years, a residual value of $25,000, and expects to drive the truck a total of 80,000
miles. The Taco shack expects to drive the truck 7,000 miles the first year and 8,100 miles the
second year
1.Complete a separate depreciation schedule for each of the alternative methods for the first
two years.
a)Straight Line
b)Units of production
c)Double-declining balance
Depletion:
● —Depreciation of oil and gas reserves and mineral deposits (wasting assets).
● —What can be capitalized: Acquisition costs, Exploration costs, Development costs, and
Restoration costs.
● —Typically use activity method of depreciation
● —Cost of the mineral resource asset to be depleted/estimated recoverable reserves
● —For example you purchase an oil rig for $5m and pay another $1m to get the oil rig
ready for use. You estimate you’ll be able to extract a total of 120,000 barrels of oil.
What is the cost per barrel of oil you would deplete the asset by as you extract the oil?
Document Summary
Choose an allocation method that mimics the nature of the asset. Straight line if service provided evenly over time (building) Units of production if service provided is a function of usage (aircraft, trucks) Declining balance if operating efficiency declines over time (machinery that wears out) More than 90% of firms use straight line or straight line in combination with another method. Choice of allocation method has no impact on taxes. On january 1st, the taco shack purchased a food truck for ,000 with an estimated useful life of 10 years, a residual value of ,000, and expects to drive the truck a total of 80,000 miles. The taco shack expects to drive the truck 7,000 miles the first year and 8,100 miles the second year. 1. complete a separate depreciation schedule for each of the alternative methods for the first two years. a)straight line b)units of production c)double-declining balance. Depreciation of oil and gas reserves and mineral deposits (wasting assets).
