CHAPTER
11
Depreciation, Impairments,
and
Depletion
……..…………………………………………………………...
DEPRECIATION
“allocating the cost of tangible assets to those
periods expected to benefit”
Depreciable base = Original cost - Salvage value
Estimated service life  physical factors
economic factors
Methods of Depreciation
 Units of production
 Straight-line
 Sum-of-the-years’ digits
 Declining-balance method

salvage value in not deducted in
determining the depreciable base
 Group and composite methods

composite depreciation rate

no gain or loss on disposition
Exercise 11-1
Cost
Life (in years)
Salvage value
(a) Straight-line
(b) Sum-of-the-years’ digits
$518,000
12
$50,000
Exercise 11-1 (continued)
(c) Double-declining balance
Book value
Rate
Deprec Exp.
Brief Exercise 11-6
Composite Depreciation
Group
Cost
A
$70,000
B
50,000
C
82,000
Salvage
$7,000
5,000
4,000
Life
10 years
5 years
12 years
Composite rate =
Discarded an asset in Group A, $4,000 cost, 7 years old:
Depreciation for Partial Years
 Determine depreciation for a full year
 Prorate between years
Exercise 11-4d: Sum-of-the-years’ digits
Total
2010
2011
2012
Depreciation Rate Revisions
 No correction of prior years
 No adjustments to “catch up”
Brief Exercise 11-7
Original estimate:
($8,000 - $1,000)/5 = $1,400
Book value at time of revision:
$8,000 - (2 x $1,400) = $5,200
New estimate:
($5,200 - $500)/2 = $2,350
IMPAIRMENTS
1. Recoverability test for impairment
future net cash flows (undiscounted) < carrying value
2. If impaired, calculate the amount of the loss
carrying value - fair value of the asset
market value or PV of future net cash flows
3. Entry:
Loss on Impairment
2,700
Accumulated Depreciation
2,700
Impairment Example
Equipment: Taffy maker
Original cost
Accum depreciation
Estimated life
Annual rev: taffy production
Annual cost: taffy production
Fair value of taffy maker
Cost of disposal
$1,000,000
600,000
4 years
$240,000
130,000
380,000
10,000
Impairment Example
Equipment: Taffy maker
Original cost
Accum depreciation
Estimated life
Annual rev: taffy production
Annual cost: taffy production
Fair value of taffy maker
Cost of disposal
$1,000,000
550,000
4 years
$240,000
130,000
380,000
10,000
DEPLETION
Depletion Base
Base
Other
Asset
Exp.
 Acquisition costs
 Exploration costs
 Development costs
 tangible equipment
 intangible costs
 Restoration costs
Recording Depletion
Inventory
Accumulated Depletion
250,000
250,000
Oil & Gas
 Full cost method

all exploration costs are
capitalized

costs of unsuccessful exploration
added to the cost of successful
wells

cannot capitalize more than the
present value of the reserves
 Successful efforts method

only costs of successful efforts are
capitalized
Special Depletion Issues
 Change in estimate of reserves

accounting is the same as
change in estimate of asset
life
 Current value of reserves

not recorded (recognized)

must be disclosed by oil & gas companies

increase in value of timber is not recorded
 Liquidating dividends

dividends in excess of retained earnings

credit the excess to Paid-in Capital
Exercises 11-16 & 11-17
Carrying amount ($9M - $1M)
Fair value
Net realizable value
11-16
Asset still used
(a)
(a)
$8,000,000
4,400,000
4,380,000
11-17
Asset not used
11-16
Asset still used
11-17
Asset not used
(b)
(b)
(c)
(c)