Problem 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?
Problem 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?
Respond to the questions that your student has asked you.
Justify your answers using examples and reasoning.