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IS ANYONE ELSE INTERESTED IN JOINING? The administrator has disabled public write access. Individual Differences and Work Perf. Are you happy with Unisa’s online registration process? Our site is valid XHTML 1. Service Life And Cost Allocation – principlesofaccounting. Determining the service life of an asset is an essential first step in calculating the amount of depreciation attributable to a specific period.
However, in accounting jargon, the term is meant to refer to the allocation of an asset’s cost to the accounting periods benefited. Thus, physical deterioration serves to establish an outer limit on the service life of an asset. The shortening of service life due to technological advances that cause an asset to become out of date and less desirable. An economic determinant of service life which is relevant when an asset is no longer fast enough or large enough to fill the competitive and productive needs of a company. Factors such as these must be considered in determining the service life of a particular asset. In some cases, all three factors come into play.
In other cases, one factor alone may control the determination of service life. Importantly, service life can be completely different from physical life. For example, computers are often replaced even though still physically functional. One prominent example is land. Accordingly, it is not considered to be a depreciable asset.
Distinguish between service life and physical life. What key factors affect the determination of service life? Loss – Other Comprehensive Income. As highlighted in the preceding table, the accounting for investments in debt securities will generally follow one of three broad approaches. One of these categories is that of trading securities. The accounting model for trading securities is straight-forward and was actually introduced in an earlier chapter. Therefore, only a brief paragraph is needed to review that method.
The accounting model is identical to the approach described in Chapter 6 for short-term investments. In other words, the investment in the debt security will be reported at each balance sheet date at its then current market value. Changes in market value from period to period are reported as unrealized gains and losses in each period’s income statement. In both cases, the investment asset account will be reflected at fair value. But, there is one significant difference pertaining to the recognition of the changes in value. For trading securities, the changes in value are recorded in operating income. This essentially means that all transactions and events make their way through net income.
Despite the all-inclusive approach, there are a few circumstances where accounting rules provide for special treatment. The changes in value on available-for-sale debt securities are recognized, not in operating income as with trading securities, but instead in this unique account. There are two reporting options for OCI. Some companies report OCI within a broader statement of comprehensive income, while others prepare a separate schedule reconciling net income to total comprehensive income.
Assume that Webster acquired an investment in Merriam Corporation debt. The intent was not for trading purposes. The investment was classified as available-for-sale. Next, assume that financial statements were being prepared on March 31. By that date, Merriam’s debt had declined in value. This charge reduces other comprehensive income.
But, net income is not reduced. The rationale is that the net income is not affected by temporary fluctuations in market value, given the intent to hold the investment for a longer term. This is equal to market value. As an alternative to directly adjusting the Available-for-Sale Debt Securities account, some companies may maintain a separate Valuation Adjustments account that is added to or subtracted from the Available-for-Sale Debt Securities account. 10,000 net income for April.