Accounting for Asset Depreciation Flashcards

Accounting for Asset Depreciation Flashcards
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Computing Depletion: Formula

Price of Land / Units of Natural Resource = Price for Each Unit of Natural Resource. Units of Natural Resource Extracted in a Period of Time x Price = Depletion

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Depletion

This is used to measure and give a cost to the rate at which resources are extracted from land. It is noted on a company's income statement and calculated using units of production.

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Accelerated Depreciation Methods

These methods for finding depreciation are used for objects that see more wear in the first years of use. Examples include the double declining balance and the sum of years' digits.

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A company purchased a print for $5,000 with a life of 5 years. Use the sum of years' digits depreciation method to find the depreciation for the first year.

1 + 2 + 3 + 4 +5 = 15. Year one depreciation = 5 /15 = 1/3 or roughly 0.3. 5,000 x 0.3 = 1,500 in depreciation.

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Sum of Years' Digits Depreciation Method

This records the highest depreciation in the first year. You add each year of the item's life together in this method and then divide the year by this total to find the depreciation percentage.

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You bought a CNC machine for $50,000. You expect it to last for ten years. Determine the amount of depreciation in the first year using the double declining balance method.

50,000 x 20% = 10,000 in depreciation on a yearly basis.

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Double Declining Balance Depreciation Method

You find depreciation with this method by taking the initial cost and multiplying it by twice the standard depreciation rate. For an item with a life of ten years, the standard rate would be 10%.

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15 cards in set

Flashcard Content Overview

Checking out this set of flashcards can give you the opportunity to review the following methods that can be utilized to calculate depreciation:

  • Double Declining Balance
  • Sum of Years' Digits
  • Units of Production
  • Straight-Line

You'll also be able to focus on how depreciation is recorded on accounting documents. Additionally, these cards cover the method used to determine depletion.

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Back
Double Declining Balance Depreciation Method

You find depreciation with this method by taking the initial cost and multiplying it by twice the standard depreciation rate. For an item with a life of ten years, the standard rate would be 10%.

You bought a CNC machine for $50,000. You expect it to last for ten years. Determine the amount of depreciation in the first year using the double declining balance method.

50,000 x 20% = 10,000 in depreciation on a yearly basis.

Sum of Years' Digits Depreciation Method

This records the highest depreciation in the first year. You add each year of the item's life together in this method and then divide the year by this total to find the depreciation percentage.

A company purchased a print for $5,000 with a life of 5 years. Use the sum of years' digits depreciation method to find the depreciation for the first year.

1 + 2 + 3 + 4 +5 = 15. Year one depreciation = 5 /15 = 1/3 or roughly 0.3. 5,000 x 0.3 = 1,500 in depreciation.

Accelerated Depreciation Methods

These methods for finding depreciation are used for objects that see more wear in the first years of use. Examples include the double declining balance and the sum of years' digits.

Depletion

This is used to measure and give a cost to the rate at which resources are extracted from land. It is noted on a company's income statement and calculated using units of production.

Computing Depletion: Formula

Price of Land / Units of Natural Resource = Price for Each Unit of Natural Resource. Units of Natural Resource Extracted in a Period of Time x Price = Depletion

You bought a mine for $100,000 and you believe you can get 1,000 diamonds out of it. In your first year of operation you get 200 diamonds. What was your depletion expense?

100,000 / 1,000 = $100
100 x 200 = 200,000
200,000 = depletion expense.

Contra-Asset Account

These accounts show the current value of an asset. They are usually used for accumulated depletion and accumulated depreciation.

Units of Production Depreciation Method

This method for finding depreciation is based on how much you use the tool being depreciated. It shows how much yearly use a tool gets most accurately.

Straight-Line Depreciation

You use this depreciation method by dividing the cost of a machine by the years you expect it to last. This gives you the yearly depreciation. You subtract this amount every year.

Use straight-line depreciation to determine how much a $40,000 truck with a life expectancy of 20 years will depreciate in year 4.

40,000 / 20 = 2,000. This truck depreciates $2,000 every year, including the fourth.

Depreciation

This represents the value a piece of equipment loses as it is used. Subtract this from an item's initial price to find it's book value.

Reporting Depreciation

You record this number on the income statement as an expense. It is also reported on the balance sheet, where the total depreciation over time is noted.

Use straight-line depreciation to determine the book value of a $40,000 truck with a life expectancy of 20 years after five years.

40,000 / 20 = 2,000. 2,000 x 5 = 10,000. 40,000 - 10,000 = 30,000.

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