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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Topic 5
Operating Assets –
Utilization and ImpairmentDepreciation Methods
11-2
Some of the cost is expensed each period.Some of the cost is expensed each period.
Cost Allocation – An Overview
ExpenseExpenseAcquisitionCost
AcquisitionCost
(Balance Sheet) (Income Statement)
The matching principle requires that part of the acquisition cost of operational assets be
expensed in periods when the future revenues are earned.
The matching principle requires that part of the acquisition cost of operational assets be
expensed in periods when the future revenues are earned.
11-3
Cost Allocation – An Overview
Some of the cost is expensed each period.Some of the cost is expensed each period.
ExpenseExpenseAcquisitionCost
AcquisitionCost
(Balance Sheet) (Income Statement)
Depreciation, depletion and amortization are cost allocation processes used to help meet the matching principle requirements.
Depreciation, depletion and amortization are cost allocation processes used to help meet the matching principle requirements.
11-4
Type ofOperational
Asset Debit
Intangible Amortization Intangible Asset
Account Credited
Accumulated Depreciation
Property, Plant, & Equipment
Depreciation
Natural Resource DepletionNatural Resource
Asset
Caution! Depreciation, depletion, and amortization are
processes of cost allocation, not valuation!
Cost Allocation – An Overview
11-5
Cost allocation requires developing three estimates for each asset:
The estimated expected use from an asset.
The estimated expected use from an asset.
Total amount of cost to be allocated.
Cost - Residual Value (at end of useful life)
Total amount of cost to be allocated.
Cost - Residual Value (at end of useful life)
The systematic approach used for allocation.
The systematic approach used for allocation.
Allocation Base
Allocation Base
Useful (Service)
Life
Useful (Service)
Life
Allocation Method
Allocation Method
Cost Allocation - Judgments
11-6
Time-based MethodsStraight-line (SL)Accelerated Methods
Sum-of-the-years’ digits (SYD)Declining Balance (DB)
Time-based MethodsStraight-line (SL)Accelerated Methods
Sum-of-the-years’ digits (SYD)Declining Balance (DB)
Activity-based methodsUnits-of-production method (UOP).Activity-based methodsUnits-of-production method (UOP).
Group andcomposite methods
Group andcomposite methods
Taxdepreciation
Taxdepreciation
Depreciation of Operational Assets
11-7
Depreciation on the Balance Sheet
Property, plant, and equipment: Land and buildings 150,000$ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000$ Less Accumulated depreciation (122,000) Net property, plant and equipment 453,000$
Net property, plant & equipment is the undepreciated cost (book value) of operating assets.
11-8
Straight-Line
The most widely used and most
easily understood method.
The most widely used and most
easily understood method.
Results in the same amount of
depreciation in each year of the asset’s
service life.
Results in the same amount of
depreciation in each year of the asset’s
service life.
Acquisition Cost
–Residual
ValueEstimated Service Life in
Years
Annual Straight-line Depreciation
=
On January 1, we purchase equipment for $50,000 cash. The equipment has an estimated service life of 5 years and estimated residual value of $5,000.
What is the annual straight-line depreciation?
On January 1, we purchase equipment for $50,000 cash. The equipment has an estimated service life of 5 years and estimated residual value of $5,000.
What is the annual straight-line depreciation?
11-9
Straight-Line
SYD depreciation is quickly computed using Excel.
11-10
Accumulated Accumulated UndepreciatedDepreciation Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)50,000$
1 9,000$ 9,000$ 9,000$ 41,000 2 9,000 9,000 18,000 32,000 3 9,000 9,000 27,000 23,000 4 9,000 9,000 36,000 14,000 5 9,000 9,000 45,000 5,000
45,000$ 45,000$
Residual ValueResidual Value
Note that at the end of the asset’s useful life, BV = Residual Value
Note that at the end of the asset’s useful life, BV = Residual Value
Straight-Line
11-11
0100020003000400050006000700080009000
1 2 3 4 5
Life in Years
De
pre
cia
tio
n
Straight-Line
11-12
Accelerated methods result in more depreciation in the early years of an
asset’s useful life and less depreciation in later years of an asset’s useful life.
Accelerated methods result in more depreciation in the early years of an
asset’s useful life and less depreciation in later years of an asset’s useful life.
Accelerated Methods
Note that total depreciation over the
asset’s useful life is the same as the Straight-
line Method.
Note that total depreciation over the
asset’s useful life is the same as the Straight-
line Method.
11-13
* Sum-of-the-
Years'-Digits
= (Useful
Life × [
Useful Life
+ 1 ] )
2
SYD depreciation is quickly computed using Excel.
The formula is as follows:
Sum-of-the-Years’ Digits (SYD)
=SYD
DepreciationResidual
Value –Cost(
Remaining Years of Useful Life
Sum-of-the-Years Digits*
×)
5+4+3+2+1= 15
11-14
On January 1, we purchase equipment for $50,000 cash. The equipment has a
service life of 5 years and an estimated residual value of $5,000.
Use Excel’s SYD function to compute depreciation
for the five years.
On January 1, we purchase equipment for $50,000 cash. The equipment has a
service life of 5 years and an estimated residual value of $5,000.
Use Excel’s SYD function to compute depreciation
for the five years.
Sum-of-the-Years’-Digits (SYD)
11-15
Sum-of-the-Years’ Digits (SYD)
11-16
Sum-of-the-Years’ Digits (SYD)
Sum-of-the-Years @SYD
Cost 50,000 50,000 50,000 50,000 50,000
Salvage Value 5,000 5,000 5,000 5,000 5,000
Estimated Life 5 5 5 5 5
Period 1 2 3 4 5
Period Depreciation 15,000 12,000 9,000 6,000 3,000 45,000
11-17
0
2000
4000
6000
8000
10000
12000
14000
16000
1 2 3 4 5
Life in Years
De
pre
cia
tio
n
Sum-of-the-Years’ Digits (SYD)
11-18
Declining-Balance (DB) Methods
DB depreciation
Based on the straight-line rate multiplied by an acceleration factor.
Computations initially ignore residual value.
DB depreciation
Based on the straight-line rate multiplied by an acceleration factor.
Computations initially ignore residual value.
Stop depreciating when:
BV=Residual Value
Stop depreciating when:
BV=Residual Value
11-19
DDB depreciation is easy to compute using Excel function =ddb
The formula is as follows:
DDB =Book Value
× ( 2 ÷ Useful Life )
Note that the Book Value will get lower each time
depreciation is computed!
Note that the Book Value will get lower each time
depreciation is computed!
Double-Declining-Balance (DDB)
11-20
On January 1, we purchase equipment for $50,000 cash. The equipment has a service
life of 5 years and an estimated residual value of $5,000.
What is depreciation forthe five two years using
double-declining-balance?
On January 1, we purchase equipment for $50,000 cash. The equipment has a service
life of 5 years and an estimated residual value of $5,000.
What is depreciation forthe five two years using
double-declining-balance?
Double-Declining-Balance (DDB)
11-21
Double-Declining-Balance (DDB)
11-22
Double-Declining-Balance (DDB)
Excel will stop depreciation when the BV = Residual Value.Excel will stop depreciation when the BV = Residual Value.
Double Declining Balance @DDBCost 50,000 50,000 50,000 50,000 50,000
Salvage Value 5,000 5,000 5,000 5,000 5,000 Estimated Life 5 5 5 5 5
Year 1 2 3 4 5 Period Depreciation $20,000 $12,000 $7,200 $4,320 $1,480 $45,000
11-23
02000400060008000
100001200014000160001800020000
1 2 3 4 5
Life in Years
De
pre
cia
tio
n
Double-Declining-Balance (DDB)
11-24
Activity-Based Depreciation
Depreciation can also be based on measures of input or output like: Service hours, or
Units-of-Production
Depreciation is not taken for idle assets.
Depreciation can also be based on measures of input or output like: Service hours, or
Units-of-Production
Depreciation is not taken for idle assets.
This approach looks different.
11-25
Acquisition Cost
–Residual
Value
Estimated Output in Units
Depreciation rate per unit
of output =
Depreciation =Depreciation rate per unit
×Units of output
Units-of-Production
11-26
On January 1, we purchased equipment for $50,000 cash. The equipment is expected to produce 100,000 units during its life and has an estimated residual value of $5,000.
If 22,000 units were produced this year, what is the amount of depreciation?
On January 1, we purchased equipment for $50,000 cash. The equipment is expected to produce 100,000 units during its life and has an estimated residual value of $5,000.
If 22,000 units were produced this year, what is the amount of depreciation?
Units-of-Production
11-27
Units-of-Production
Units of ProductionCost 50,000
Salvage Value 5,000 Estimated Life-Units 100,000
Per Unit 0.45 Current Production 22,000
Period Depreciation 9,900$
11-28
Use of Various Depreciation Methods
11-29
Comparison With MACRS (Tax Depreciation)Covered in Income Tax Course & Referred to in Intermediate III
Ignores residual
value
Provides for rapid write-off
Rates based on asset
“class lives”
Most corporations use the Modified Accelerated Cost Recovery System
(MACRS) for tax purposes.
Most corporations use the Modified Accelerated Cost Recovery System
(MACRS) for tax purposes.
11-30
Depreciation Disclosures
Depreciation. Balances of major classes of depreciable
assets. Accumulated depreciation by asset or in
total. General description of
depreciation methods used.
Depreciation. Balances of major classes of depreciable
assets. Accumulated depreciation by asset or in
total. General description of
depreciation methods used.
11-31
I bought an asset on May 19 this year. Do I get a full
year’s depreciation?
May19
Partial-Period Depreciation
11-32
Partial-Period Depreciation
Half-Year ConventionTake ½ of a year of depreciation in the year of acquisition, and the other ½ in
the year of disposal.
Half-Year ConventionTake ½ of a year of depreciation in the year of acquisition, and the other ½ in
the year of disposal.
Pro-rating the depreciation based on the date of acquisition is time-consuming
and costly. A commonly used alternative is the . . .
11-33
Partial Year – Demo Problem
On March 31,2009 Canseco Plumbing Fixtures purchased equipment for $30,000. Residual value at the end of an estimated four-year service life is expected to be $2,000. The company expects the machine to operate for 10,000 hours. Calculate depreciation expense for 2009 and 2010 using straight line depreciation method (a) Partial Year basis(b) Half Year Convention
11-34
Partial Year – Demo Problem
SLM for a full year: [$30,000 - 2,000]/4 = $7,000
a.2009 $7,000 x 9/12 = $5,2502010 $7,000 x 12/12 = $7,000
b.2009 $7,000 x 50% = $3,5002010 $7,000 x 100% = $7,000
11-35
Group and Composite Methods
Assets are grouped by common characteristics. An average depreciation rate is used. Annual depreciation is the average rate × the
total group acquisition cost. Accumulated depreciation records are not
maintained for individual assets.
Assets are grouped by common characteristics. An average depreciation rate is used. Annual depreciation is the average rate × the
total group acquisition cost. Accumulated depreciation records are not
maintained for individual assets.
If assets in the group are sold, or new assets added, the composite rate remains the same.
When an asset in the group is sold or retired, debit accumulated depreciation for the difference between the asset’s cost and the proceeds.
If assets in the group are sold, or new assets added, the composite rate remains the same.
When an asset in the group is sold or retired, debit accumulated depreciation for the difference between the asset’s cost and the proceeds.
11-36GROUP AND COMPOSITE DEPRECIATION
Page 243.
If there are no changes in the assets contained in the group, depreciation of $52,800 per year (16% x $330,000) will be recorded for 5.15 years.
11-37
BE 11-4
Mondale Winery depreciates its equipment using the group method. The cost of equipment purchased in 2013 totaled $425,000. The estimated residual value of the equipment was $40,000 and the group depreciation rate was determined to be 18%.
What is the annual depreciation for the group? If equipment that cost $42,000 is sold in 2014 for
$35,000, what amount of gain or loss will the company recognize for the sale?
11-38
BE 11-4 Solution
Annual depreciation will equal the group rate multiplied by the depreciable base of the group: ($425,000 – 40,000) x 18% = $69,300
Since depreciation records are not kept on an individual asset basis, dispositions are recorded under the assumption that the book value of the disposed item exactly equals any proceeds received and no gain or loss is recorded. Any actual gain or loss is implicitly included in the accumulated depreciation account.
11-39
BE 11-4 Solution
Journal entry for sale Cash 35,000 Acc. Dep (difference) 7,000
Equipment (cost) 42,000
11-40
The approach is based on the units-
of-production method.
The approach is based on the units-
of-production method.
As natural resources are “used up”, or
depleted, the cost of the natural resources must be allocated to the units extracted.
As natural resources are “used up”, or
depleted, the cost of the natural resources must be allocated to the units extracted.
Depletion of Natural Resources
11-41
Cost of Natural Resource
–Residual
Value
Estimated Recoverable Units
Depletion rate per unit
=
Total Depletion
Cost =
Unit Depletion Rate
×Units
Extracted
Depletion of Natural Resources
11-42
ABC Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,100,000.
ABC estimated the land contained 40,000 tons of ore, and
that the land will be sold for $100,000 after the coal is mined.
Depletion of Natural Resources
11-43
What is ABC’s unit depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
What is ABC’s unit depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
Depletion of Natural Resources
11-44
What is ABC’s unit depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
What is ABC’s unit depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
Cost / Units
$1,000,000 / 40,000 Tons
= $25 Per Ton
Cost / Units
$1,000,000 / 40,000 Tons
= $25 Per Ton
Depletion of Natural Resources
11-45
For the year ABC mined 13,000 tons and sold 9,000 tons. What is the total depletion and the depletion expense?
a. $325,000 & $225,000
b. $325,000 & $325,000
c. $225,000 & $225,000
d. $275,000 & $225,000
For the year ABC mined 13,000 tons and sold 9,000 tons. What is the total depletion and the depletion expense?
a. $325,000 & $225,000
b. $325,000 & $325,000
c. $225,000 & $225,000
d. $275,000 & $225,000
Depletion of Natural Resources
11-46
For the year ABC mined 13,000 tons and sold 9,000 tons. What is the total depletion and the depletion expense?
a. $325,000 & $225,000
b. $325,000 & $325,000
c. $225,000 & $225,000
d. $275,000 & $225,000
For the year ABC mined 13,000 tons and sold 9,000 tons. What is the total depletion and the depletion expense?
a. $325,000 & $225,000
b. $325,000 & $325,000
c. $225,000 & $225,000
d. $275,000 & $225,000
Depletion of Natural Resources
Depletion = 13,000 x $25
= $325,000
Expense = 9,000 x $25
= $225,000
Depletion = 13,000 x $25
= $325,000
Expense = 9,000 x $25
= $225,000
11-47
Amortization of Intangible Assets
The amortization process uses the straight-line method, but assumes
residual value = 0.
The amortization process uses the straight-line method, but assumes
residual value = 0.
Amortization period is the shorter of:
Economic Life
Legal Life
or
11-48
Amortization of Intangible Assets
The amortization entry is:The amortization entry is:
GENERAL JOURNAL Page 42
Date Description PR Debit Credit
Amortization Expense $$$
Intangible Asset $$$
Note that the amortization process does not use a contra-asset account.
11-49
Torch, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in
federal registration fees. The device has a useful life of 5 years. The legal life is 20
years.
At the end of year 1, what is Torch’s amortization expense?
Torch, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in
federal registration fees. The device has a useful life of 5 years. The legal life is 20
years.
At the end of year 1, what is Torch’s amortization expense?
Amortization of Intangible Assets
11-50
Amortization = Cost ÷ Economic life = $3,000 ÷ 5 years = $ 600 per year
Use the shorter of economic life (5 years) or legal life (20 years).
Record the amortization entry.
Amortization of Intangible Assets
11-51
Note that the patent will have a book value of $2,400 after this amortization entry is posted.
Amortization of Intangible Assets
GENERAL JOURNAL Page 42
Date Description PR Debit Credit
Amortization Expense 600
Patent 600
11-52
Intangible Assets Not Subjectto Amortization
Not amortized.Not amortized.
Subject to assessment for impairment
value and may bewritten down.
Subject to assessment for impairment
value and may bewritten down.
Goodwill
11-53
ESTIMATED service lifeESTIMATED service life
ESTIMATED residual valueESTIMATED
residual value
Changes in estimates are accounted for prospectively. The book value less any residual value at the date of change is depreciated over
the remaining useful life. A disclosure note should describe the effect of a change.
On January 1, equipment was purchased that cost $30,000, has a useful life of 10 years, and no residual
value. At the beginning of the fourth year, it was decided that there were only 5 years remaining,
instead of 7 years. Calculate depreciation for the fourthyear using the straight-line method.
Changes in Estimates
11-54
Asset cost 30,000$ Accumulated depreciation ($3,000 per year × 3 years) 9,000 Remaining book value 21,000 Divide by remaining life ÷ 5Revised annual depreciation 4,200$
What happens if we change depreciation methods?
Changes in Estimates
11-55
Change in Depreciation Method
We account for these changes prospectively, exactly as we would any
other change in estimate.
We account for these changes prospectively, exactly as we would any
other change in estimate.
A change in depreciation, amortization, or depletion method is considered a change in accounting estimate that is achieved by a
change in accounting principle.
A change in depreciation, amortization, or depletion method is considered a change in accounting estimate that is achieved by a
change in accounting principle.
On January 1, 2011, Matrix Inc. purchased office equipment for $400,000. Matrix expected a residual value $40,000, and
a service life of 5 years. Matrix uses the double-declining-balance method to depreciate this type of asset. During
2013, the company switched from double-declining balance to straight-line depreciation. The residual value remained at $40,000. Let’s determine the amount of depreciation to be
recorded for 2013.
11-56
Depreciation - 2011 160,000$ ($400,000 × 40%)Depreciation - 2012 96,000 [($400,000 - $160,000) × 40%]Total Depreciation 256,000$
Cost of asset 400,000$ Less: Accumulated depreciation 256,000 Undepreciated balance 144,000$ Less: residual value (40,000) New depreciable amount 104,000 Remaining service life ÷ 3 Annual depreciation 34,667$
Change in Depreciation Method
December 31, 2013:Depreciation expense ................................... 34,667
Accumulated depreciation................ 34,667To record depreciation expense.
11-57
Error Correction
Errors found in a subsequent accounting period are corrected
by . . . Entries that restate the incorrect account
balances to the correct amount.
Restating the prior period’s financial
statements.
Reporting the correction
as a prior period
adjustment to Beginning
R/E.In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on net income, income before extraordinary items, and
earnings per share.
11-58
Brief Exercise 11-7
At the beginning of 2011, Robotics, Inc. acquired a manufacturing facility for $12 million. $9 million of the purchase price was allocated to the building. Depreciation for 2011 and 2012 was calculated using the straight-line method, a 25-year useful life, and a $1 million residual value.
In 2013, the estimates of useful life and residual value were changed to 20 years and $500,000, respectively.
What is depreciation on the building for 2013?
11-59
Brief Exercise 11-7
Original calculation of annual depreciationCost 9,000,000$
Residual value 1,000,000$ useful 25
annual depreciation $320,000accumulated depreciation $640,000
Recalculation of annual depreciationUndepreciated cost $8,360,000
Revised residual value $500,000remaining useful life 18
revised annual depreciation 436,667$
Work this using Excel function =SLN
11-60
Brief Exercise 11-8
Refer to the situation described in BE 11-7. Assume that instead of changing the useful life and residual value, in 2013 the company switched to the double-declining-balance depreciation method. How should Robotics account for the change? What is depreciation on the building for 2013?
11-61
Brief Exercise 11-8
a change in the depreciation method reflects:estimated future benefits from the asset,
the pattern of receiving those benefits, or
the company’s knowledge about those benefits
Voluntary changes in accounting principles are reported retrospectively
11-62
Brief Exercise 11-8
A disclosure note should justify that the change is preferable and describe the effect of the change on any financial statement
line items and per share amounts affected for all periods reported.
Original calculation of annual depreciation using SLNCost 9,000,000$
Residual value 1,000,000$ useful 25
annual depreciation $320,000accumulated depreciation $640,000
Recalculation of annual depreciation using DDBUndepreciated cost $8,360,000
residual value $1,000,000remaining useful life 23
revised annual depreciation 726,957$
11-63
Brief Exercise 11-9
Refer to the situation described in BE 11-7. Assume that 2011 depreciation was incorrectly recorded as $32,000. This error was discovered in 2013. How should Robotics account for the error? What is depreciation on the building for 2013 assuming the error was judged material, no change in estimate of useful life or residual value? (ignore income tax)
11-64
Brief Exercise 11-9 Errors are retrospectively restated to reflect the
correction. If retained earnings is one of the incorrect accounts, the correction is reported as a prior period adjustment to the beginning balance in the statement of shareholders’ equity.
Depreciation of $32,000 should have been recorded. ($8,000,000 25 years). Therefore, 2011 retained earnings tax is overstated by $288,000 ($320,000 – 32,000) and accumulated depreciation is understated by the same amount. The following journal entry is needed to record the error correction (ignoring income tax):
11-65
Brief Exercise 11-9
In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on net income, income before extraordinary item, and
earnings per share.
Retained Earnings 288,000Accumulated Depreciation 288,000
Only the annual depreciation is reported in 2013.
11-66
Impairment of Value
Long-term assetsto be held and usedLong-term assets
to be held and usedLong-term assets
held for saleLong-term assets
held for sale
Tangible andintangible with finiteuseful lives
Tangible andintangible with finiteuseful lives
Intangibleswith
indefiniteuseful lives
Intangibleswith
indefiniteuseful lives
GoodwillGoodwill
Test for impairment
of value when
consideredfor sale.
Test for impairment of value at
least annually.
Test for impairment of value
when it is suspected that book
value may not be recoverable.
Test for impairment
of value when it is likely that
the fair value of a
reporting unit is less
than its book value.
Accounting treatment differs.Accounting treatment differs.
Operating assets
11-67
Operating Assets to be Held and Used
An asset is impaired when . . .
The undiscounted sum of its
estimated future cash flows
Measurement – Step 1Measurement – Step 1
Itsbookvalue
<
11-68
Impairmentloss =
Bookvalue
Fairvalue–
Measurement – Step 2
$0 $250$125
Case 1: $50 book value.No loss recognized
Case 2: $150 book value. No loss recognized
Case 3: $275 book value.Loss = $275 – $125
Fair valueUndiscounted future
cash flows
Market value, price of similar assets,
or PV of future net cash inflows.
Reported in the incomestatement as a separate component of operating
expenses
Operating Assets to be Held and Used
11-69
Operating Assets to be Held and Used
Step 1 $140 million < $200 million
Impairment loss is indicated.
Because Acme Auto Parts has seen its sales steadily decrease due to the decline in new car sales, Acme’s
management believes that equipment that originally cost $350 million, with a $200 million book value, may not be
recoverable. Management estimates that future undiscounted cash flows associated with the equipment’s remaining useful life will be only $140 million, and that the equipment’s fair value is $120 million. Has Acme suffered an impairment loss and, if so, how should it be recorded?
11-70
Step 2 Impairment loss = $200 million – $120 million = $80
million
Impairment loss ................................... 80,000,000Accumulated depreciation ................... 150,000,000
Equipment ……………………. 230,000,000To record impairment loss.
Operating Assets to be Held and UsedBecause Acme Auto Parts has seen its sales steadily
decrease due to the decline in new car sales, Acme’s management believes that equipment that originally cost $350 million, with a $200 million book value, may not be
recoverable. Management estimates that future undiscounted cash flows associated with the equipment’s remaining useful life will be only $140 million, and that the equipment’s fair value is $120 million. Has Acme suffered an impairment loss and, if so, how should it be recorded?
11-71
Step 2 Loss = BV of goodwill less implied
value of goodwill.
Step 2 Loss = BV of goodwill less implied
value of goodwill.
GoodwillGoodwill
Step 1 If BV of reporting unit > FV, impairment
indicated.
Step 1 If BV of reporting unit > FV, impairment
indicated.
Other Indefinite-life intangibles
Other Indefinite-life intangibles
One-Step Process
If BV of asset > FV, recognize
impairment loss.
One-Step Process
If BV of asset > FV, recognize
impairment loss.
Indefinite-Life IntangiblesThis item covered in Advanced Accounting
11-72
Brief Exercise 11-10
Collison and Ryder Company (C&R) has been experiencing declining market conditions for its sportswear division. Management decided to test the operational assets of the division for possible impairment. The test revealed the following: book value of division’s assets, $26.5 million;
fair value of division’s assets, $21 million;
sum of estimated future cash flows generated from the division’s assets, $24 million.
What amount of impairment loss should C&R recognize?
11-73
Brief Exercise 11-10
Because the undiscounted sum of future cash flows of $24 million is less than book value of $26.5 million, there is an impairment loss. The impairment loss is calculated as follows:
11-74
Expenditures Subsequent to Acquisition
Maintenance and
ordinary repairs.
Maintenance and
ordinary repairs.
Additions.Additions.
Improvements (betterments), replacements,
and extraordinary repairs.
Improvements (betterments), replacements,
and extraordinary repairs.
Rearrangements and other
adjustments.
Rearrangements and other
adjustments.
11-75
Normally we debit an expense account for amounts spent on:
Expenditures Subsequent to Acquisition
11-76
Normally we debit the asset account for amounts spent on:
Expenditures Subsequent to Acquisition
11-77
Normally we debit the asset account for amounts spent on:
Expenditures Subsequent to Acquisition
11-78
Normally, we debit an asset account for amounts spent on
Rearrangements : changes made in an existing process for improved output or improved efficiency. Normally, the cost of rearrangements are
capitalized
Expenditures Subsequent to Acquisition
11-79
Brief Exercise 11-16
Demmert Manufacturing incurred the following expenditures during the current fiscal year:
- annual maintenance on its machinery, $5,400; remodeling of offices, $22,000;
rearrangement of the shipping and receiving area resulting in an increase in productivity, $35,000;
addition of a security system to the manufacturing facility, $25,000.
How should Demmert account for each of these expenditures?
11-80
Brief Exercise 11-16
Annual maintenance on machinery, $5,400 - This is an example of normal repairs and maintenance. Future benefits are not increased; therefore the expenditure should be expensed in the period incurred.
Remodeling of offices, $22,000 - This is an example of an improvement. The cost of the remodeling should be capitalized and depreciated, either by direct capitalization of the cost, or a reduction of accumulated depreciation.
11-81
Brief Exercise 11-16
Rearrangement of the shipping and receiving area, $35,000 - This is an example of a rearrangement. Because the rearrangement increased productivity, the cost should be capitalized and depreciated.
Addition of a security system, $25,000 - This is an example of an addition. The cost of the security system should be capitalized and depreciated.