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Chapter11-1

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Chapter11-2

C H A P T E RC H A P T E R 1111

DEPRECIATION, IMPAIRMENTS,DEPRECIATION, IMPAIRMENTS,

AND DEPLETIONAND DEPLETION

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

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Chapter11-3

1.1. Explain the concept of depreciation.Explain the concept of depreciation.

2.2. Identify the factors involved in the depreciation process.Identify the factors involved in the depreciation process.

3.3. Compare activity, straight-line, and decreasing-charge methodsCompare activity, straight-line, and decreasing-charge methods

of depreciation.of depreciation.

4.4. Explain special depreciation methods.Explain special depreciation methods.

5.5. Explain the acconting isses related to asset impairment.Explain the acconting isses related to asset impairment.

!.!. Explain the acconting procedres for depletion of natralExplain the acconting procedres for depletion of natral

resorces.resorces.

".". Explain ho# to report and analy$e property, plant, e%ipment,Explain ho# to report and analy$e property, plant, e%ipment,

and natral resorces.and natral resorces.

Learning ObjectivesLearning Objectives

Learning ObjectivesLearning Objectives

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Chapter11-4

DepreciationDepreciation

Factors involvedFactors involved

Methods ofMethods of

depreciationdepreciation

Special methodsSpecial methods

Special issuesSpecial issues

Ipairent!Ipairent! Dep"etionDep"etionPre!entationPre!entation

an# Ana"$!i!an# Ana"$!i!

RecognizingRecognizing

impairmentsimpairments

MeasuringMeasuring

ImpairmentsImpairments

Restoration ofRestoration of

lossloss

Assets to beAssets to be

disposed ofdisposed of

PresentationPresentation

AnalysisAnalysis

Establishing aEstablishing a

basebase

Writeoff ofWriteoff of

resource costresource cost

EstimatingEstimating

reservesreserves

!i"uidating!i"uidating

dividendsdividends

#ontinuing#ontinuing

controversycontroversy

Depreciation, Impairments, and DepletionDepreciation, Impairments, and Depletion

Depreciation, Impairments, and DepletionDepreciation, Impairments, and Depletion

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Chapter11-%

&llocating costs of long-term assets'

(ixed assets ) *epreciation expense

Intangi+les ) &morti$ation expense

atral resorces ) *epletion expense

Depreciationis the acconting process of allocatingthe cost of tangi+le assets to expensein a systematicand rational manner to those periods expected to+enefit from the se of the asset.

Depreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation


LO 1 Eplain the concept of depreciation!LO 1 Eplain the concept of depreciation!

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Chapter11-&



LO " Identif# the factors involved in the depreciation process!LO " Identif# the factors involved in the depreciation process!

hree +asic %estions'

$actors Involved in the Depreciation %rocess

1/ 0hat deprecia+le +ase is to +e sed

2/ 0hat is the assets sefl life

3/ 0hat method of cost allocation is +est

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Chapter11-'

Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation


Depreciable &ase


Ill'stration 11-1Ill'stration 11-1

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Chapter11-(



Estimation of (ervice Lifes


ervice life of an asset often differs from itsphysical life.

Companies retire assets for t#o reasons'

physical factors sch as casalty orexpiration of physical life/ and

economic factors o+solescence/.

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Chapter11-)


LO ) Compare activit#, straight-line, and decreasing-LO ) Compare activit#, straight-line, and decreasing-charge methods of depreciation!charge methods of depreciation!

he profession re%ires the method employed +esystematic and rational. Examples inclde'

Methods of Depreciation

1/ &ctivity method nits of se or prodction/.2/ traight-line method.

3/ m-of-the-years-digits.

4/ *eclining-+alance method.

5/ 6rop and composite methods.

!/ 7y+rid or com+ination methods.

&ccelerated methods&ccelerated methods

pecial methodspecial methods

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Chapter11-1*



Activit# MethodIll'stration 11-"Ill'stration 11-"

Ill'stration* If tanley ses the crane for 4,888 horsthe first year, the depreciation charge is'

(tanle# Coal(tanle# CoalMines $actsMines $acts

Ill'stration 11-)Ill'stration 11-)

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Chapter11-11



(traight-Line MethodIll'stration 11-"Ill'stration 11-"

Ill'stration* tanley comptes depreciation as follo#s'


Ill'stration 11-+Ill'stration 11-+

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Chapter11-12



Decreasing-Charge MethodsIll'stration 11-"Ill'stration 11-"


('m-of-the-ears-Digits! Each fraction ses the sm of

the years as a denominator5 9 4 9 3 9 2 9 1 ) 15/. he

n'meratoris the nm+er of years of estimated life

remaining as of the +eginning of the year.

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Chapter11-13



('m-of-the-ears-DigitsIll'stration 11-.Ill'stration 11-.

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Chapter11-14



Decreasing-Charge MethodsIll'stration 11-"Ill'stration 11-"


Declining-&alance Method!

:tili$es a depreciation rate percentage/ that is some

mltiple of the straight-line method.

*oes not dedct the salvage vale in compting the

depreciation +ase.

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Chapter11-1%



Declining-&alance MethodIll'stration 11-/Ill'stration 11-/

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Chapter11-1&



E11-0 Depreciation Comp'tations2$o'r Methods3* ;CCorporation prchased a ne# machine for its assem+ly process on

&gst 1, 2818. he cost of this machine #as

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Chapter11-1'



(traight-line Method

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Chapter11-1(


LO )LO )

Activit# Method Ass'me 455 ho'rs 'sed in "5153Ass'me 455 ho'rs 'sed in "5153

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Chapter11-2*


Do'ble-Declining &alance Method

LO )LO )

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Chapter11-21


LO + Eplain special depreciation methods!LO + Eplain special depreciation methods!

he choice of method depends on the natre of theassets involved'

(pecial Depreciation Methods

8ro'p methodsed #hen the assets are similar innatre and have approximately the same sefl lives.

Composite approachsed #hen the assets aredissimilar and have different lives.

Companies are also free to develop tailor-madedepreciation methods, provided the method reslts inthe allocation of an assets cost in a systematic andrational manner 7y+rid or Com+ination ?ethods/.

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Chapter11-22



(pecial Depreciation Iss'es1/ 7o# shold companies compte depreciation for

partial periods

Companies normally compte depreciation on the+asis of the nearest fll month.

2/ *oes depreciation provide for the replacement ofassets

(nds for the replacement of the assets come fromthe revenes

3/ 7o# shold companies handle revisions indepreciation rates

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Chapter11-23

Changes in Depreciation 9ate&cconted for in the period of change andftre periods Change in Estimate/

ot handled retrospectivelyot considered errors or extraordinary items



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Chapter11-24

&rcadia 7, prchased e%ipment for

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Chapter11-2%

E%ipmentE%ipment

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Chapter11-2&

Change in Estimate EampleChange in Estimate EampleChange in Estimate EampleChange in Estimate Eample &fter " years&fter " years

et +oo= valeet +oo= vale

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Chapter11-2'

ImpairmentsImpairmentsImpairmentsImpairments

LO 0 Eplain the acco'nting iss'es related to asset impairment!LO 0 Eplain the acco'nting iss'es related to asset impairment!

0hen the carrying amont of an asset is notrecovera+le, a company records a #rite-off referred

to as an impairment.

Events leading to an impairment*

a. *ecrease in the mar=et vale of an asset.

+. Change in the manner in #hich an asset is sed.

c. &dverse change in legal factors or in the +siness climate.

d. &n accmlation of costs in excess of the amont originallyexpected to ac%ire or constrct an asset.

e. & proAection or forecast that demonstrates contining lossesassociated #ith an asset.

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Chapter11-2(



Meas'ring Impairments1. Fevie# events for possi+le impairment.

2. If the revie# indicates impairment, apply therecovera+ility test. If the sm of the expected ftre

net cash flo#s from the long-lived asset is less than thecarrying amont of the asset, an impairment hasoccrred.

3. &ssming an impairment, the impairment loss is the

amont +y #hich the carrying amont of the assetexceeds the fair vale of the asset. he fair vale isthe mar=et vale or the present vale of expectedftre net cash flo#s.

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Chapter11-2)



Ill'stration 11-1.Acco'nting forImpairments

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Chapter11-3*

E11-1. Impairment3* Gresented +elo# is information related toe%ipment o#ned +y GAols Company at *ecem+er 31, 2818. &ssmethat GAols #ill contine to se this asset in the ftre. &s of*ecem+er 31, 2818, the e%ipment has a remaining sefl life of 4years.

Instrctions'

a3 Grepare the Aornal entry if any/ to record the impairment of theasset at *ecem+er 31, 2818.

b3 Grepare the Aornal entry to record depreciation expense for 2811.

c3 he fair vale of the e%ipment at *ecem+er 31, 2811, is

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Chapter

11-31

Hoss on impairment 3,!88,888

&ccmlated depreciation 3,!88,888


a3!a3!

123118


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Chapter

11-32

*epreciation expense 1,188,888

&ccmlated depreciation 1,188,888


b3!b3!

c3!c3!Festoration of any impairment loss is not permitted.

123111


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Chapter

11-33

;at'ral reso'rces, often called #asting assets,inclde petrolem, minerals, and tim+er.

hey have t#o main featres'

DepletionDepletionDepletionDepletion

LO . Eplain the acco'nting proced'res for depletion of nat'ral reso'rces!LO . Eplain the acco'nting proced'res for depletion of nat'ral reso'rces!

1. complete removal consmption/ of the asset, and2. replacement of the asset only +y an act of natre.

Depletionis the process of allocating the cost ofnatral resorces.

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Chapter

11-34

Establishing a Depletion &ase



Comptation of the depletion +ase involves for factors'

1/ &c%isition cost of the deposit,

2/ Exploration costs,

3/ *evelopment costs, and

4/ Festoration costs.

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Chapter

11-3%

=rite-off of 9eso'rce Cost



ormally, companies compte depletion on a 'nits-of-prod'ction methodan activity approach/. hs,

depletion is a fnction of the nm+er of nits extracteddring the period.

Calclation'

otal cost J alvage valeotal cost J alvage vale

otal estimated nits availa+leotal estimated nits availa+le ) *epletion cost per nit) *epletion cost per nit

:nits extracted x Cost per nit:nits extracted x Cost per nit ) *epletion) *epletion

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Chapter

11-3&

E11-1> Depletion Comp'tations2?imber3*7ernande$ im+erCompany o#ns D,888 acres of tim+erland prchased in 1DDD at acost of

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Chapter

11-3'

E11-1> Depletion Comp'tations2?imber3



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Chapter

11-3(

E11-1> Depletion Comp'tations2?imber3



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Chapter

11-3)

Estimating 9ecoverable 9eserves



ame as acconting for changes in estimates.

Fevise the depletion rate on a prospective +asis.

*ivides the remaining cost +y the ne# estimate of the

recovera+le reserves.

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Chapter

11-4*

Li

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Chapter

11-41

Contin'ing Controvers#

Kil and 6as Indstry'

(ll cost concept

ccessfl efforts concept



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Chapter

11-42

%resentation of %ropert#, %lant, E

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Chapter

11-43

hehe assets t'rnoveris a measre of a firms a+ility tois a measre of a firms a+ility togenerate sales from a particlar investment in assets.generate sales from a particlar investment in assets.

%resentation and Anal#sis%resentation and Anal#sis%resentation and Anal#sis%resentation and Anal#sis

LO / Eplain ho@ to report and anal#e propert#,LO / Eplain ho@ to report and anal#e propert#,plant, e

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Chapter

11-44



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Chapter

11-4%



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Chapter

11-4&

he analyst o+tains frther insight into the +ehavior of FK&he analyst o+tains frther insight into the +ehavior of FK&+y+y disaggregatingdisaggregatingit into components of profit margin onit into components of profit margin on

sales and asset trnover as follo#s'sales and asset trnover as follo#s'

et Income

&verage otal &ssets

Fate of Fetrnon &ssets )

et Income

et ales

Grofit ?argin onales

)et ales

&ssetrnoverx

x

&verage otal &ssets



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Chapter

11-4'

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Chapter

11-4(

:nder +oth i6&&G and :.. 6&&G, interest costs incrred dring

constrction mst +e capitali$ed.

i6&&G, li=e :.. 6&&G, capitali$es all direct costs in self-

constrcted assets.

he acconting for exchanges of nonmonetary assets has recently

converged +et#een i6&&G and :.. 6&&G.

i6&&G permits the same depreciation methods straight-line,

accelerated, nits-of-prodction/ as :.. 6&&G.

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Chapter

11-4)

&s discssed in the Chapter 4 Convergence Corner, i6&&G permits

asset revalations #hich are not permitted in :.. 6&&G/.Conse%ently, companies that se the revalation frame#or= mst

follo# revalation depreciation procedres.

i6&&G also ses a fair vale test to measre the impairment loss.

7o#ever, i6&&G does not se the first-stage recovera+ility testsed nder :.. 6&&GMcomparing the ndisconted cash flo#s to

the carrying amont. hs, the i6&&G test is more strict than :..

6&&G.

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Chapter

11-%* LO 4 Describe income ta methods of depreciation!LO 4 Describe income ta methods of depreciation!

Modified Accelerated Cost 9ecover# (#stem

?&CF differs from 6&&G in three respects'

1. a mandated tax life, #hich is generally shorter than

the economic lifeN

2. cost recovery on an accelerated +asisN and

3. an assigned salvage vale of $ero.

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Chapter

11-%1 LO 4 Describe income ta methods of depreciation!LO 4 Describe income ta methods of depreciation!


?a Lives 9ecover# %eriods3Ill'stration 11A-1Ill'stration 11A-1

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Chapter



?a Depreciation MethodsIll'stration 11A-"Ill'stration 11A-"

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Chapter


Modified Accelerated Cost 9ecover# (#stemIll'stration* Compter and peripheral e%ipment prchased+y *enise Fode Company on anary 1, 288D.

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Chapter


Modified Accelerated Cost 9ecover# (#stemIll'stration*

Ill'stration 11A-)Ill'stration 11A-)

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Chapter

11-%% LO 4 Describe income ta methods of depreciation!LO 4 Describe income ta methods of depreciation!


Ill'stration* :sing the ratesfrom the ?&CF

depreciation rate schedlefor a 5-year class ofproperty, Fode comptesdepreciation as follo#s

Ill'stration 11A-+Ill'stration 11A-+

Ill'stration 11A-0Ill'stration 11A-0

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Chapter

11-%& LO 4 Describe income ta methods of depreciation!LO 4 Describe income ta methods of depreciation!


&dditional Isses&dditional Isses

Kptional straight-line methodKptional straight-line method

ax verss +oo= depreciationax verss +oo= depreciation

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Chapter

Copyright O 288D ohn 0iley P ons, Inc. &ll rights reserved.Feprodction or translation of this #or= +eyond that permitted

in ection 11" of the 1D"! :nited tates Copyright &ct

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is nla#fl. Fe%est for frther information shold +eaddressed to the Germissions *epartment, ohn 0iley P ons,

Inc. he prchaser may ma=e +ac=-p copies for hisher o#n

se only and not for distri+tion or resale. he G+lisher

assmes no responsi+ility for errors, omissions, or damages,cased +y the se of these programs or from the se of the

information contained herein.

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