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Intermediate accounting 17e by kieso ch11

Intermediate Accounting
Seventeenth Edition

Kieso ● Weygandt ● Warfield

Chapter 11

Depreciation, Impairments, and Depletion
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Learning Objectives
After studying this chapter, you should be able to:

1.

Understand depreciation concepts and methods of depreciation.

2.

Discuss special depreciation methods and other depreciation issues.


3.

Identify the accounting issues related to asset impairment.

4.

Explain the accounting procedures for depletion of natural resources.

5.

Demonstrate how to report and analyze property, plant, equipment, and natural resources.

Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 11
Depreciation, Impairments, and Depletion
Depreciation



Factors involved



Methods of depreciation

Special Methods and Other Issues



Special depreciation methods



Other depreciation issues

Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 11
Impairments



Recognizing impairments



Measuring impairments



Restoration of loss



Assets to be disposed of

Copyright ©2019 John Wiley & Sons, Inc.

4


Preview of Chapter 11
Depletion



Establishing a base



Write-off of resource cost



Estimating reserves



Liquidating dividends



Continuing controversy

Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 11
Presentation and Analysis



Presentation



Analysis

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Learning Objective 1
Describe Depreciation Concepts and Methods of Depreciation

LO 1

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Depreciation—A Method of Cost Allocation

Depreciation is the accounting process of allocating the cost of tangible assets to expense in a
systematic and rational manner to those periods expected to benefit from the use of the asset.
Allocating costs of long-lived assets:

LO 1



Fixed assets = Depreciation expense



Intangibles = Amortization expense



Natural resources = Depletion expense

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Factors Involved in the Depreciation Process

Three basic questions:

LO 1

1)

What depreciable base is to be used?

2)

What is the asset’s useful life?

3)

What method of cost apportionment is best for this asset?

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Factors Involved in Depreciation
Depreciable Base for the Asset

Original cost

LO 1

$10,000

Less: Salvage value

1,000

Depreciation base

$ 9,000

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Factors Involved in Depreciation
Estimation of Service Lives

LO 1



Service life often differs from physical life



Companies retire assets for two reasons:
1.

Physical factors (casualty or expiration of physical life).

2.

Economic factors (inadequacy, supersession, and obsolescence).

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Methods of Depreciation
The profession requires the method employed be “systematic and rational.” Methods used include:

1.
2.
3.

Activity method (units of use or production).
Straight-line method.
Decreasing-charge methods (accelerated)

a.
b.
4.

Declining-balance method.

Special depreciation methods:

a.
b.
LO 1

Sum-of-the-years’-digits.

Group and composite methods.
Hybrid or combination methods.

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Activity Method
Cost of crane

Stanley Coal Mines Facts

Estimated useful life
Estimated salvage value
Productive life in hours

$500,000
5 years
$ 50,000
30,000 hours

Illustration: If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is:

LO 1

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Straight-Line Method
Cost of crane

Stanley Coal Mines Facts

Estimated useful life
Estimated salvage value
Productive life in hours

$500,000
5 years
$ 50,000
30,000 hours

Illustration: Stanley computes depreciation as follows:

LO 1

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Decreasing-Charge Methods
Cost of crane

Stanley Coal Mines Facts

Estimated useful life
Estimated salvage value
Productive life in hours

$500,000
5 years
$ 50,000
30,000 hours

Sum-of-the-Years’-Digits. Each fraction uses the sum of the years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The
numerator is the number of years of estimated life remaining as of the beginning of the year.

Alternate sum-of-the-years’ calculation

LO 1

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Sum-of-the-Years’-Digits
Depreciation Schedule
Year

a

LO 1

Depreciation

Remaining Life in

Base

Years

Depreciation Fraction

Depreciation

Book Value,

Expense

End of Year

1

$450,000

5

5/15

$150,000

$350,000

2

450,000

4

4/15

120,000

230,000

3

450,000

3

3/15

90,000

140,000

4

450,000

2

2/15

60,000

80,000

5

450,000

1

1/15

30,000

50,000

15

15/15

$450,000

Salvage value.

Copyright ©2019 John Wiley & Sons, Inc.

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a


Decreasing-Charge Methods
Declining-Balance Method
Cost of crane

Stanley Coal Mines Facts

Estimated useful life
Estimated salvage value
Productive life in hours



Utilizes a depreciation rate (percentage) that is some multiple of the straight-line method.



Does not deduct the salvage value in computing the depreciation base.

LO 1

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$500,000
5 years
$ 50,000
30,000 hours

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Declining-Balance Method
Depreciation Schedule
Book Value
of Asset
Year

a
b

LO 1

First of Year

Balance
Rate on Declining
a
Balance

Depreciation

Accumulated

Book Value, End of

Expense

Depreciation

Year

1

$500,000

40%

$200,000

$200,000

$300,000

2

300,000

40%

120,000

320,000

180,000

3

180,000

40%

72,000

392,000

108,000

4

108,000

40%

43,000

435,200

64,800

5

64,800

40%

14,800

450,000

50,000

b

Based on twice the straight-line rate of 20% ($90,000/$450,000 = 20%; 20% × 2 = 40%).
Limited to $14,800 because book value should not be less than salvage value.

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Methods of Depreciation
Illustration—(Four Methods): Maserati Corporation purchased a new machine for its assembly process on August 1,
2017. The cost of this machine was $150,000. The company estimated that the machine would have a salvage value of
$24,000 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 21,000 hours.
Year-end is December 31.
Instructions: Compute the depreciation expense under the following methods.
(a)

Straight-line depreciation.

(b)

Activity method

(c)

Sum-of-the-years’-digits.

(d)

Double-declining balance.

LO 1

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Straight-Line Method
Depreciation Schedule

Current

Depreciable

Annual
Years

Expense

Partial

Year

Accum.

Year

Expense

Deprec.

Year

Base

2017

$126,000

/

5

=

$25,200 ×

5/12

=

$ 10,500

$ 10,500

2018

126,000

/

5

=

25,200 ×

 

=

25,200

35,700

2019

126,000

/

5

=

25,200 ×

 

=

25,200

60,900

2020

126,000

/

5

=

25,200 ×

 

=

25,200

86,100

2021

126,000

/

5

=

25,200 ×

 

=

25,200

111,300

2022

126,000

/

5

=

25,200 ×

7/12

=

14,700

126,000

$126,000
Journal entry:
2017

Depreciation Expense

10,500

Accumultated Depreciation
LO 1

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10,500
20


(Assume 800 hours used in 2017)

Activity Method

($126,000/21,000 hours = $6 per hour)

Depreciation Schedule
Current
(Given)

Rate per

Annual

Partial

Year

Accum.

Year

Hours

Hours

Expense

Year

Expense

Deprec.

2017

800

$4,800

$4,800

×

$6

=

2018

×

=

2019

×

=

$4,800

2020

 

×

=

 

2021

 

×

=

 

800

$4,800

Journal entry:
2017

Depreciation Expense

4,800

Accumultated Depreciation
LO 1

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4,800
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Sum-of-the-Years’-Digits Method
Depreciation Schedule (7/12 = .58333)

Current

Depreciable

Annual
Years

Expense

Partial

Year

Accum.

Year

Expense

Deprec.

Year

Base

2017

$126,000

×

5/15

=

$42,000

×

5/12

=

$ 17,500

$ 17,500

2018

126,000

×

4.583/15

=

38,500

×

 

=

38,500

56,000

2019

126,000

×

3.583/15

=

30,100

×

 

=

30,100

86,100

2020

126,000

×

2.583/15

=

21,700

×

 

=

21,700

107,800

2021

126,000

×

1.583/15

=

13,300

×

 

=

13,300

121,100

2022

126,000

×

.583/15

=

4,900

×

=

4,900

126,000

$126,000
Journal entry:
2017

Depreciation Expense

17,500

Accumultated Depreciation
LO 1

Copyright ©2019 John Wiley & Sons, Inc.

17,500
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Double-Declining Balance Method
Depreciation Schedule
Depreciable

Rate Per

Annual

Year

Base

Year

2017

$150,000

×

40%

=

$60,000

×

5/15

=

$ 25,000

$ 17,500

2018

125,000

×

40%

=

50,000

×

 

=

50,000

56,000

2019

75,000

×

40%

=

30,000

×

 

=

30,000

86,100

2020

45,000

×

40%

=

18,000

×

 

=

18,000

107,800

2021

27,000

×

40%

=

10,800

×

Plug

=

3,000

121,100

$126,000

$126,000

Expense

Partial

Current Year

Accum.

Year

Expense

Deprec.

Journal entry:
2017

Depreciation Expense

25,000

Accumultated Depreciation
LO 1

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25,000
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Learning Objective 2
Discuss Special Depreciation Methods and Other Depreciation Issues

LO 2

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Special Depreciation Methods and Other Issues

Special Depreciation Methods
Two methods of depreciating multiple-asset accounts exist:



Group method used when the assets are similar in nature and have approximately the same useful lives.



Composite method used when the assets are dissimilar and have different lives.

Choice of method depends on the nature of the assets involved.
The computation for group or composite methods is essentially the same: find an average and depreciate on that
basis.

LO 2

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