Intermediate Accounting Reporting and Analysis 2017 Update 2e James M Wahlen Jefferson P Jones Donald P Pagach
1. The service life of an asset can only be measured in units of activity or output.
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2. GAAP allows companies to choose between time-based, activity, group, or composite cost allocation methods, but once the method is chosen it must be applied consistently over time. This ensures that financial information is comparable.
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| 3. The depreciation base is computed as follows:
Estimated Residual Value = Depreciation Base – Asset Cost
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4. The use of accelerated methods is appropriate when the asset will be used more in the later periods versus earlier periods.
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5. The purpose of depreciation is to allocate the asset’s cost systematically and rationally over the life of the asset to ensure that the company has adequate capital for future replacement.
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6. GAAP does not require companies to disclose the balances of depreciable assets by nature or function but by major classes.
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7. Since the purpose of depreciation is to match the total cost of the asset with the benefits to be derived from the asset, the costs of repairs and maintenance associated with the asset should be considered when choosing a depreciation method.
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8. Group depreciation is applied to heterogeneous assets.
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9. Composite depreciation is applied to homogeneous assets which have similar service lives and residual values.
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10. GAAP requires the general description of the methods used in the computation of depreciation regarding major classes of assets to be disclosed in the notes of the financial statements.
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