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Lecture 10

RSM220H1 Lecture Notes - Lecture 10: Book ValuePremium

2 pages96 viewsSpring 2018

Department
Rotman Commerce
Course Code
RSM220H1
Professor
Amy Kwan
Lecture
10

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Depreciation is a method of cost allocation
What asset components are depreciated separately
1.
What is asset's depreciable amount
2.
Over what period is asset depreciated
3.
What pattern best reflects how asset's benefits are used up
4.
Determining depreciation expense
Multiple components may be grouped if they have same useful lives and depreciation methods
Parts of PPE asset that are not individually significant can be grouped and depreciated as single
component
Components
Calculating depreciation
Original cost less estimated residual/salvage value
Residual value is net amount expected to be received for asset today if it were of the age and in
the condition expected at the end of its useful life
Residual value should be reviewed at least annually under IFRS
Depreciate as long as residual value lower than carrying amount
IFRS does not permit salvage value
Salvage value is estimated NRV at end of asset's life (not at end of useful life)
Depreciable amount
Begins when asset is available for use
Ends when asset is derecognized or classified as held for sale
Period of time over which asset will produce revenue for company
Useful life also know as economic life
Useful life and physical life are not the same
Obsolescence
Economic factors
Wear and tear
Physical factors
Expiration of contract
Legal life
Factors affecting useful life:
Depreciation period
Reflect pattern of benefits expected from use of asset
Also factor in simplicity, cost, perceived economic consequences
Depreciation method
Simple
Assumes constant usage, other costs same each year
Distorts rate of return analysis
Straight line
Best match of some assets productivity to cost
More depreciation in earlier years when asset has greatest balance
Maintenance costs increase in later periods, reducing benefits
Does not deduct residual value
Rate of depreciation = (100%/useful life)*2
Diminishing balance
Appropriate if usage not function of time
Difficult to estimate total number of units over life of asset
Activity
Depleted over time as resources are removed
Use activity method
Debited to COGS once resource is sold
Depletion charge initially debited to inventory
If equipment's useful life is clearly linked to life of resource, is also amortized using units of
production method
Natural resources
Week 10: Depreciation, Impairment, and Disposition
March 26, 2018
RSM220 Page 1
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