chapter 11 notes.docx

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Department
Accounting & Financial Management
Course
AFM 291
Professor
Robert Ducharme
Semester
Fall

Description
Chapter 11 Depreciation - A Method of Allocation  Depreciation is a means of cost allocation  Depreciable amount is the asset's cost less its residual amount  Terms amortization and depreciation are interchangeable  Amortization refers to the general process of allocating the carrying amount of any long lived asset to the accounting periods that benefit from its use  Amortization refers to the general process of allocating the carrying amount of any long lived asset to the accounting periods that benefit from its use  Depreciation is reserved for PPE and depletion is used only with natural resource assets Factors Considered in the Depreciation Process  Asset component depreciated  Asset's depreciable amount  Period asset is depreciated  Pattern best reflects how the asset's economic benefits are used up  Depreciation can only ever be an estimate Asset Components  Management needs to develop a componentization policy; guide decisions on which fixed asset components to recognize separately  Identify part of PPE asset whose cost is significant and group together with similar useful lives and patterns  Add the costs of the remaining parts, none of which is individually significant and group them to depreciate as one component Depreciable Amount  As long as the residual value < asset's carrying amount, depreciation is recognized on the asset  Residual value reviewed be reviewed on a regular basis  More technical and conservative policy required under private entity GAAP based on higher of two amounts: (a) cost - salvage value over the life of asset (b) cost - residual value over the asset's useful life  Salvage value is the estimate of the asset's net realizable value at the end
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