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# Depreciation, Impairments, Depletion

1 - You just got hired as an adjunct professor for a local university. You are teaching introductory accounting and just beginning a chapter on depreciation. A student asks, "Why is it necessary to have depreciation, depletion, and amortization expense? Aren't they all basically the same thing? Can't we just use one term for each of these different types?" How would you respond to the student? What is the value of using three different account names like this? How are depreciation, depletion, and amortization handled on the balance sheet? How might the different estimates affect the financial statements?

2- You are an accounting tutor. One of your students is confused about impairment because the student has learned earlier that all assets are recorded at their historical cost. The student has the following list of questions for you:
What are the rules of impairment, and when might an asset end up impaired? Provide examples to justify your answer.
How can a balance be computed with any amount of accuracy? Isn't this just an estimate that can be subjective? Why?
What happens if the asset increases in value after an impairment loss is recorded?

#### Solution Preview

1 - Depreciation is used for physical assets, depletion is used for natural resources, like coal mines, and amortization is used for an intangible asset. All three methods are basically the same in purpose; to expense the cost of the asset. All three methods are also based on the same GAAP principle. The asset under all three methods is given a useful life in terms of a number of years or an indefinite life. The cost of the asset is then depreciated against the number of years. As the revenue is made from that asset, the cost of the asset is expensed through depreciation. It allows the company to expense the asset, which accounts for the wear and tear on the asset. Depreciation, depletion, and amortization all function the same. They are all carried on the balance sheet under the respective assets. Depreciation is listed on the balance sheet as an accumulated amount, so it contains the total amount of depreciation to-date from the physical assets. The same is true for depletion and amortization. Accumulated amounts are shown on the ...

#### Solution Summary

1 - You just got hired as an adjunct professor for a local university. You are teaching introductory accounting and just beginning a chapter on depreciation. A student asks, "Why is it necessary to have depreciation, depletion, and amortization expense? Aren't they all basically the same thing? Can't we just use one term for each of these different types?" How would you respond to the student? What is the value of using three different account names like this? How are depreciation, depletion, and amortization handled on the balance sheet? How might the different estimates affect the financial statements?

2- You are an accounting tutor. One of your students is confused about impairment because the student has learned earlier that all assets are recorded at their historical cost. The student has the following list of questions for you:
What are the rules of impairment, and when might an asset end up impaired? Provide examples to justify your answer.
How can a balance be computed with any amount of accuracy? Isn't this just an estimate that can be subjective? Why?
What happens if the asset increases in value after an impairment loss is recorded?