Concepts of Microeconomics
CHAPTER 11 QUESTIONS
1. Distinguish among depreciation, depletion, and amortization expenses.
Depreciation refers to the cost allocation of tangible long-term assets; depletion refers to the cost allocation of natural resources; and amortization refers to the cost allocation of intangible assets. All three terms have similar underlying principles governing their use.
2. What factors must be considered in determining the periodic deprecation charges that should be made for a company’s depreciable assets?
Four separate factors must be considered in determining the periodic depreciation charges that should be made for a company’s assets. They are (1) asset cost, (2) residual or salvage value, (3) useful life, and (4) pattern of use. These factors, when considered together, help determine which of the common methods are most appropriate for the circumstances.
3. What role does residual, or salvage, and value play in the various methods of time-factor deprecation?
Residual or salvage value is included in the formulas for all time-factor depreciation methods except for the declining-balance methods. In practice, residual value is often ignored if it is the practice of a company to retain assets for most of their useful lives. In the case of declining-balance methods, although residual value is not included in the formulas, it is considered when an asset is near the end of its useful life. Generally, the book value should not be reduced below its expected residual value.
4. Distinguish between the functional and physical factors affecting the useful life of an tangible noncurrent operating assets.
Functional factors include inadequacy and obsolescence that reduce the usefulness of the asset. Physical factors include wear and tear, deterioration and decay, and damage or destruction reducing the usefulness of the asset.
5. Distinguish between time-factor and use-factor methods of depreciation.
Time-factor methods of depreciation base cost
1. Distinguish among depreciation, depletion, and amortization expenses.
Depreciation refers to the cost allocation of tangible long-term assets; depletion refers to the cost allocation of natural resources; and amortization refers to the cost allocation of intangible assets. All three terms have similar underlying principles governing their use.
2. What factors must be considered in determining the periodic deprecation charges that should be made for a company’s depreciable assets?
Four separate factors must be considered in determining the periodic depreciation charges that should be made for a company’s assets. They are (1) asset cost, (2) residual or salvage value, (3) useful life, and (4) pattern of use. These factors, when considered together, help determine which of the common methods are most appropriate for the circumstances.
3. What role does residual, or salvage, and value play in the various methods of time-factor deprecation?
Residual or salvage value is included in the formulas for all time-factor depreciation methods except for the declining-balance methods. In practice, residual value is often ignored if it is the practice of a company to retain assets for most of their useful lives. In the case of declining-balance methods, although residual value is not included in the formulas, it is considered when an asset is near the end of its useful life. Generally, the book value should not be reduced below its expected residual value.
4. Distinguish between the functional and physical factors affecting the useful life of an tangible noncurrent operating assets.
Functional factors include inadequacy and obsolescence that reduce the usefulness of the asset. Physical factors include wear and tear, deterioration and decay, and damage or destruction reducing the usefulness of the asset.
5. Distinguish between time-factor and use-factor methods of depreciation.
Time-factor methods of depreciation base cost