Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Section 1:Depreciation
Classification of the assets section in the statement of financial position.
The assets section of the statement of financial position contains the following:
Assets
Non Current assets
1- Long term investments
2- Tangible assets (Property plant and equipment)
Plant Assets
[ Depreciation ]
Natural resources
[ Depletion ]
3- Intangible assets
[ Amortization ]
Patent
Copyright
Franchise
Exercise 1:
Amber corporation buys a truck on January 1, 2011 . information relating to the truck is as
follows:
* Cost
$50,000
* Estimated service life
5 years ( or 100,000 miles )
* Salvage Value
$ 5,000
* Actual Miles driven:
22,000 miles (in 2011 ) ; 35,000 miles ( in 2012 ) ; 13,000 miles ( in 2013 )
15,000 miles (in 2014 ) ; 10,000 miles ( in 2015 )
Instructions:
Prepare a depreciation schedule using:
1. Activity method (units of use or production).
2. Straight-line method.
3. Diminishing (accelerated)-charge methods:
 Sum-of-the-years’-digits.
 Declining-balance method.
Solution:
1. Activity method (units of use or production).
Actual Units Depreciation
Depreciation
Accumulated
Years
Book Value
of Use
Cost per unit
Expenses
depreciation
2011
22,000
0.45
9,900
9,900
40,100
2012
35,000
0.45
15,750
25,650
24,350
2013
13,000
0.45
5,850
31,500
18,500
2014
15,000
0.45
6,750
38,250
11,750
2015
10,000
0.45
4,500
45,000
5,000
Solution formulas:
1. Actual Units of activity
= used units during the year ( Given )
2. Depreciation cost per unit
= ( Cost – Salvage Value ) ÷ Total Estimated Activity .
= ( $50,000 - $5,000 ) ÷ 100,000 Miles = $0.45
3. Depreciation Expenses = Actual units of Use * Depreciation cost per unit
4. Accumulated Depreciation = Last year Acc/ Dep. + Current year Depreciation Exp.
5. Book Value = Cost – Accumulated Depreciation
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
2. Straight-line method.
Depreciable
Depreciation
Depreciation
Accumulated
Years
Book Value
cost
Rate
Expenses
depreciation
2011
45,000
20%
9,000
9,000
41,000
2012
45,000
20%
9,000
18,000
32,000
2013
45,000
20%
9,000
27,000
23,000
2014
45,000
20%
9,000
36,000
14,000
2015
45,000
20%
9,000
45,000
5,000
Solution formulas:
1. Depreciable cost = Cost – Salvage Value = ( 50,000 – 5,000)
2. Depreciation Rate = 1/ UL * 100 = % = (1 ÷ 5 ) × 100 = 20%
3. Depreciation Expenses = Depreciable Cost * Depreciation Rate
= ( Cost – Residual Value ) / U L
4. Accumulated Depreciation = Last year Acc/ Dep. + Current year Depreciation Exp.
= (Depreciation Expense * Years ) For SLM only
3. Diminishing (accelerated)-charge methods:
 Sum-of-the-years’-digits.
Depreciable
Depreciation
Accumulated
Years
Fraction
Book Value
base
Expenses
depreciation
2011
45,000
5 / 15
15,000
15,000
35,000
2012
45,000
4 / 15
12,000
27,000
23,000
2013
45,000
3 / 15
9,000
36,000
14,000
2014
45,000
2 / 15
6,000
42,000
8,000
2015
45,000
1 / 15
3,000
45,000
5,000
Solution formulas:
1- Depreciable Base = cost – salvage value
Number of year ( at beginning of year )
N*(N+1)
2- Fraction = ------------------------------------------------S = ----------------------Sum of years ( S )
2
3- Depreciation expense = Depreciable cost * Fraction
 Declining-balance method.
Book value at
Depreciation
Accumulated
Year
Rate
Book Value
beginning
Expenses
depreciation
2011
50,000
40%
20,000
20,000
30,000
2012
30,000
40%
12,000
32,000
18,000
2013
18,000
40%
7,200
39,200
10,800
2014
10,800
40%
4,320
43,570
6,480
2015
6,480
40%
1,480
45,000
5,000
Solution formulas:
1- Book value at beginning = Cost – Acc/ Dep.
= Cost at first year because Acc/ Dep. = Zero at beginning
= Book value at the end of last year for the following years
2- (1 ÷ Useful life) * 100 * 2 =
%
3- depreciation expenses = Book value at beginning * depreciation rate
4- Accumulated Depreciation = Last Acc/Dep. + Depreciation Exp
5- Book Value = Cost – Accumulated Depreciation
Intermediate Accounting 2:IFRS
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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Special Cases:
(1) How should companies compute depreciation for partial periods?
Exercise 2:
Amber corporation buys a truck on April 1, 2011 . information relating to the truck is as
follows:
* Cost
$50,000
* Estimated service life
5 years ( or 100,000 miles )
* Salvage Value
$ 5,000
* Actual Miles driven:
22,000 miles (in 2011 ) ; 35,000 miles ( in 2012 ) ; 13,000 miles ( in 2013 )
15,000 miles (in 2014 ) ; 10,000 miles ( in 2015 )
Instructions:
Compute the depreciation expense under the following methods.
(a) Activity method.
(b) Straight-line depreciation.
(c) Sum-of-the-years’-digits.
(d) Double-declining balance.
Solution:
Activity Method
Actual Units
Years
of Use
2011
22,000
2012
35,000
2013
13,000
2014
15,000
2015
10,000
Depreciation
Cost per unit
0.45
0.45
0.45
0.45
0.45
Straight Line Method
Depreciable Depreciation
Years
cost
Rate
2011
45,000
20%
2012
45,000
20%
2013
45,000
20%
2014
45,000
20%
2015
45,000
20%
2016
45,000
120%
Intermediate Accounting 2:IFRS
Depreciation
Expenses
9,900
15,750
5,850
6,750
4,500
Partial
Year
9/12
3/12
Accumulated
depreciation
9,900
25,650
31,500
38,250
45,000
Depreciation Accumulated
Expenses
depreciation
6,750
6,750
9,000
15,750
9,000
24,750
9,000
33,750
9,000
42,750
2,250
45,000
Page 3 of 12
Book Value
40,100
24,350
18,500
11,750
5,000
Book Value
43,250
34,250
25,250
16,250
7,250
5,000
Ehab Abdou 97672930
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Sum of years digits
Years
2011
2012
2013
2014
2015
2016
Depreciable
base
45,000
45,000
45,000
45,000
45,000
45,000
Double-declining balance.
Book value
at
Year
beginning
2000
50,000
2001
35,000
2002
21,000
2003
12,600
2004
7,560
3/12 = 0.25
Fraction
5/15
4.25/15
3.25/15
2.25/15
1.25/15
0.25/15
Rate
40%
40%
40%
40%
40%
Partial
Year
9/12
Depreciation Accumulated
Expenses
depreciation
11,250
11,250
12,750
24,000
9,750
33,750
6,750
40,500
3,750
44,250
750
45,000
Book Value
38,750
26,000
16,250
9,500
5,750
5,000
Partial
Year
9/12
Depreciation Accumulated
Expenses
depreciation
15,000
15,000
14,000
29,000
8,400
37,400
5,040
42,440
2,560
45,000
Book Value
35,000
21,000
12,600
7,560
5,000
(2) Group Depreciation.
Exercise 3:
EuroAsia Airlines purchases an airplane for €100,000,000 on January 1, 2011. The airplane
has a useful life of 20 years and a residual value of €0. EuroAsia uses the straight-line
method of depreciation for all its airplanes. EuroAsia identifies the following components,
amounts, and useful lives.
Instructions:
Compute the depreciation expense for EuroAsia airplane for 2011.
Solution:
Intermediate Accounting 2:IFRS
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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Journal Entry:
Date
Dec 31, 2011
Accounts
Depreciation expenses
Accumulated depreciation
Dr.
8,600,000
Cr.
8,600,000
(3) Revising Depreciation?
Handled prospectively and not retrospectively
Exercise 4:
On Jan 1, 2011 Equipment was purchased at a cost of $46,000 with salvage value of $6,000 and 8
years useful life, during 2013 the company revises its estimate of service live from 8 years to 12 years
and salvage value to $3,000. The company has a policy of using the straight-line method to
depreciate equipment. and
Instruction:
1. Prepare any required journal entry to correct the prior years’ depreciation?
2. Calculate the depreciation expense for 2014.
Purchase Date
Cost
Service live
Salvage value
Method
Jan 1, 2011
$46,000
8 years
$6,000
SLM
Revising Date
Book Value
New Service Live
New Salvage Value
Method
2013
?
12 years
$3,000
SLM
Solution:
1. No entry required to correct the prior year's depreciation.
2. Depreciation expenses for 2012.
Book Value of the assets at beginning of 2013 [End of 2012] :
a. Depreciation expenses
=
=
= $5,000
b. Accumulated depreciation = Depreciation expenses × years = $5,000 × 2
c. Book Value = Cost – Accumulated depreciation = $46,000 - $10,000
= $10,000
= $36,000
Revised Depreciation for 2013 and following years :
Revised Depreciation =
Revised Depreciation =
Journal Entry:
Date
Dec 31, 2011
Accounts
Depreciation expenses
Accumulated depreciation
Intermediate Accounting 2:IFRS
Page 5 of 12
= $3,300
Dr.
3,300
Cr.
3,300
Ehab Abdou 97672930
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Section 2:Impairment ‫النقص الحاد في قيمة األصل‬
‫القيمة االستردادية‬
‫القيمة التي يمكن الحصول عليها‬
‫من خالل األصل‬
‫سواء من‬
‫ بـيــــــع األصل‬-1
‫ استخدام األصل‬-2
1- Book Value ( Carrying Value )
= Cost – Accumulated Depreciation
2- Recoverable Amount
= The Higher of
a. Value of Sell = Selling Price – Cost to Sell
b. Value in Use = Present Value of Future Cash Flow (Revenue + Residual Value)
= [(Rev × PVF-OA) + (R.V × PVF)
Exercise 5:
At the end of 2010, Verma Company tests a machine for impairment. The machine has a carrying
amount of $200,000. It has an estimated remaining useful life of five years. Because there is little
market-related information on which to base a recoverable amount based on fair value, Verma
determines the machine’s recoverable amount should be based on value-in-use. Verma uses a
discount rate of 8 percent. Verma’s analysis indicates that its future cash flows will be $40,000
each year for five years, and it will receive a residual value of $10,000 at the end of the five years.
It is assumed that all cash flows occur at the end of the year.
Solution:
1. Determining the recoverable amount based in Fair Value.
2. Conducting an Impairment Test.
Intermediate Accounting 2:IFRS
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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
3. Recording Impairment Loss.
Date
Accounts
Dec 31, 2010
Loss on Impairment
Accumulated depreciation
Dr.
166,514
Cr.
166,514
Reversal of Impairments Loss.
Exercise 6:
Presented below is information related to equipment owned by Marley Company at December 31, 2010.
Cost
Accumulated depreciation to date
Value-in-use
Fair value less cost of disposal
€ 7,000,000
1,500,000
5,000,000
4,400,000
Assume that Marley will continue to use this asset in the future. As of December 31, 2010, the equipment
has a remaining useful of 4 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010.
(b) Prepare the journal entry to record depreciation expense for 2011.
(c) The recoverable amount of the equipment at December 31, 2011, is €5,250,000. Prepare the
journal entry (if any) necessary to record this increase.
Solution
(a)
(b)
December 31, 2010
Loss on impairment..........................................
Accumulated Depreciation––Equipment.....
Value in use
Fair value less cost of disposal
(=) Recoverable Amount (Higher Value)
5,000,000
4,400,000
Cost
(-) Accumulated depreciation
(=) Book Value
Loss on impairment
7,000,000
1,500,000
500,000
500,000
5,000,000
5,500,000
- 500,000
December 31, 2011
Depreciation Expense..........................................
1,250,000
Accumulated Depreciation––Equipment........
1,250,000
New carrying amount.................. €5,000,000
Useful life.................................... ÷ 4 years
Depreciation per year................. €1,250,000
(c) Accumulated Depreciation––Equipment.............. 1,500,000
Recovery of Impairment Loss .........................
Intermediate Accounting 2:IFRS
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1500,000
Ehab Abdou 97672930
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Revaluations
Companies may value long-lived tangible asset after acquisition at cost or fair value.
Revaluation—Land
Illustration:
Siemens Group (DEU) purchased land for €1,000,000 on January 5, 2010. The company elects to
use revaluation accounting for the land in subsequent periods. At December 31, 2010, the land’s
fair value is €1,200,000. The entry to record the land at fair value is as follows.
Land
200,000
Unrealized Gain on Revaluation - Land
200,000
Note:
Unrealized Gain on Revaluation—Land increases other comprehensive income in the statement of
comprehensive income.
Revaluation—Depreciable Assets
Illustration:
Lenovo Group (CHN) purchases equipment for ¥500,000 on January 2, 2010. The equipment has a
useful life of five years, is depreciated using the straight-line method of depreciation, and its
residual value is zero. Lenovo chooses to revalue its equipment to fair value over the life of the
equipment. Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5) at December 31,
2010, as follows.
Depreciation Expense
Accumulated Depreciation—Equipment
100,000
100,000
After this entry, Lenovo’s equipment has a carrying amount of ¥400,000 (¥500,000 - ¥100,000).
Lenovo receives an independent appraisal for the fair value of equipment at December 31, 2010,
which is ¥460,000.
Accumulated Depreciation—Equipment
100,000
Equipment
Unrealized Gain on Revaluation—Equipment
Intermediate Accounting 2:IFRS
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40,000
60,000
Ehab Abdou 97672930
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Section 3: Depletion
Normally, companies compute depletion for natural recourses like (Mineral recourses,
timberlands) Using a units-of-production method (activity approach).
Note:
The cost of Natural recourses is composed of:
(1) Pre-exploratory costs.
(2) Exploratory and evaluation costs.
(3) Development costs.
Illustration:
MaClede Co. acquired the right to use 1,000 acres of land in South Africa to mine for silver. The
lease cost is $50,000, and the related exploration costs on the property are $100,000. Intangible
development costs incurred in opening the mine are $850,000. MaClede estimates that the mine
will provide approximately 100,000 ounces of silver, MaClede extracts 25,000 ounces in the first
year.
Instructions:
Prepare the journal entry to record the depletion expenses for the first year.
Solution:
Inventory
Accumulated Depletion
M
’
250,000
250,000
ff
Intermediate Accounting 2:IFRS
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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Ch 12 : Intangible Assets Issues
► Characteristics of Intangible assets:
Three Main Characteristics:
(1) Identifiable, (Can be sold)
(2) Lack physical existence.
(3) Not monetary assets.
Normally classified as non-current asset.
► Valuation of Intangible assets:
Purchased Intangibles:
 Recorded at cost.
 Includes all expenditures necessary to make the intangible asset ready for its intended use.
 Typical costs include:
 Purchase price.
 Legal fees.
 Other incidental expenses. ‫مصروفات عرضية‬
Internally Created Intangibles:
 Companies expense all research phase costs and some development phase costs.
 Certain development costs are capitalized once economic viability criteria are met.
 IFRS identifies several specific criteria that must be met before development costs are
capitalized.
Beginning of
The Project
Research phase
Ready for
Sale or use
Expenses
Development phase
Expenses
Capitalize
Economic Viability
► Accounting Treatment for Intangibles
Intermediate Accounting 2:IFRS
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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Exercise:
Harcott Co. incurs $180,000 in legal costs on January 1, 2011, to successfully defend a patent.
The patent’s useful life is 20 years, amortized on a straight-line basis. Harcott records the legal
fees and the amortization at the end of 2011 as follows.
Date
Accounts
Dr.
Cr.
Jan 01, 2011
Patent
180,000
Cash
180,000
Dec 31, 2011
Patent Amortization Expenses
9,000
Patent
9,000
Goodwill




Conceptually, represents the future economic benefits arising from the other assets
acquired in a business combination that are not individually identified and separately
recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of ...
Cost of the purchase over the FMV of the identifiable net assets purchased.
Internally created goodwill should not be capitalized.
Exercise:
Multi-Diversified, Inc. decides that it needs a parts division to supplement its existing
tractor distributorship. The president of Multi-Diversified is interested in buying São Paulo,
Brazil. The illustration presents the statement of financial position of Tractorling Company.
Multi-Diversified investigates Tractorling’s underlying assets to determine their fair values.
Tractorling Company decides to accept Multi-Diversified’s offer of $400,000. What is the
value of the goodwill, if any?
Intermediate Accounting 2:IFRS
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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Solution:
Multi-Diversified records this transaction as follows.
Date
Accounts
Jan 01, 2011
Property, Plant, and Equipment
Patents
Inventories
Receivables
Cash
Goodwill
Liabilities
Cash
Dr.
205,000
18,000
122,000
35,000
25,000
50,000
Cr.
55,000
400,000
Goodwill Write-off
 Goodwill considered to have an indefinite life.
 Should not be amortized.
 Only adjust carrying value when goodwill is impaired.
 Describe the accounting procedures for recording goodwill.
Intermediate Accounting 2:IFRS
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Ehab Abdou 97672930