Partial Year Depreciation, Disposals,
and Impairment
Chapter 8
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Accelerated Depreciation
Accelerated depreciation matches higher depreciation
expense with higher revenues
in the early years of an asset’s useful life
when the asset is more efficient.
Early Years
Later Years
Depreciation
Expense
High
Low
Repair
Expense
Low
High
Declining-Balance Method
Declining balance rate
of 2 is double-decliningbalance (DDB) rate.
Cost – Accumulated Depreciation
Annual
Depreciation
expense
=
Net
Book
Value
×
(
2
Useful Life in Years
)
Annual computation ignores residual value.
At the beginning of the year, Southwest purchased equipment for
$62,500 cash. The equipment has an estimated useful life of 3
years and an estimated residual value of $2,500.
Calculate the depreciation expense for the first two years.
Declining-Balance Method
Annual
Depreciation
expense
Net
Book
Value
=
×
(
2
Useful Life in Years
Year 1 Depreciation:
$62,500 ×
(
2
3 years
) = $41,667
Year 2 Depreciation:
($62,500 – $41,667) ×
(
2
3 years
) = $13,889
)
Declining-Balance Method
Year
1
2
3
Depreciation
Expense
(debit)
Accumulated
Depreciation
Balance
$
$
$
41,667
13,889
4,629
60,185
41,667
55,556
60,185
Undepreciated
Balance
(book value)
$
62,500
20,833
6,944
2,315
Below residual value
($62,500 – $55,556) ×
(
2
3 years
) = $4,629
Declining-Balance Method
Year
1
2
3
Depreciation
Expense
(debit)
Accumulated
Depreciation
Balance
$
$
$
41,667
13,889
4,444
60,000
41,667
55,556
60,000
Undepreciated
Balance
(book value)
$
62,500
20,833
6,944
2,500
Depreciation expense is limited to the amount that
reduces book value to the estimated residual value.
• Work on E8-7
• Do E8-8 with the following Changes:
– Stamping Machine was purchased on October 1
and not at the beginning of the year.
Partial Year Depreciation
• You only depreciate an asset for the time you
own it.
• For Straight-line Depreciation: first year and
last year will be partial years.
• For Units of Production: usage is adjusted by
actual units produced each year.
• For Double Declining Balance: in first year,
calculate annual depreciation, then multiply
by percentage of year.
Measuring Asset Impairment
Impairment is the loss of a significant portion
of the utility of an asset through . . .
• Casualty.
• Obsolescence.
• Lack of demand for the asset’s services.
Test of Impairment:
Compare Book Value to Future Cash Flows
Record Impairment:
Loss = difference between Book Value and Fair
Market Value
Recognize a
loss when
an asset
suffers a
permanent
impairment.
Impairment Problem
• Mike Company purchased an asset on January 1,
2005 for $500,000. It was expected to have a ten
year useful life with zero residual value. At
December 31, 2010 determined that the future
cash flows of the asset were estimated to be
$100,000 and the fair market value of the asset is
$175,000.
• Determine if an asset has been impaired and if,
so, prepare the journal entry to record the
impairment.
Types of Asset Disposals
Disposal of Property, Plant and Equipment
Voluntary disposals:
• Sale
• Trade-in
• Retirement
Involuntary disposals:
• Fire
• Accident
Disposal of Property, Plant, and
Equipment
 Update depreciation
to the date of disposal.
 Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Recording a
gain (credit)
or loss (debit).
Writing off accumulated
depreciation (debit).
Writing off the
asset cost (credit).
Disposal of Property, Plant, and
Equipment
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Southwest Airlines sold flight equipment
for $5,000,000 cash at the end of its
17th year of use. The flight equipment originally cost
$20,000,000, and was depreciated using the straight-line
method with zero residual value
and a useful life of 20 years.
Let’s answer the following questions.
Disposal of Property, Plant, and Equipment
The amount of depreciation expense recorded at
the end of the 17th year to bring depreciation up
to date is:
a.
b.
c.
d.
$0.
$1,000,000.
$2,000,000.
$4,000,000.
Annual Depreciation:
($20,000,000 - $0) ÷ 20 Years.
= $1,000,000
Disposal of Property, Plant, and Equipment
Accumulated Depreciation =
(17yrs. × $1,000,000)
= $17,000,000
After updating
the depreciation,
the equipment’s
book
value at theDepreciation
end of the
BV = Cost
- Accumulated
17th year is:
BV = $20,000,000 - $17,000,000
= $3,000,000
a.
b.
c.
d.
$3,000,000.
$16,000,000.
$17,000,000.
$4,000,000.
Disposal of Property, Plant, and Equipment
The equipment’s sale resulted in:
a.
b.
c.
d.
a gain of $2,000,000.
a gain of $3,000,000.
a gain of $4,000,000.
a loss of $2,000,000.
Gain = Cash Received - Book Value
Gain = $5,000,000 - $3,000,000 = $2,000,000
Disposal of Property, Plant, and
Equipment
Prepare the journal entry to record Southwest’s sale of the
equipment at the end of the 17th year.
GENERAL JOURNAL
Date
Description
Cash (+A)
Accumulated Depreciation (+XA)
Gain on Sale (+Gain, +SE)
Flight Equipment (-A)
Debit
Page 8
Credit
5,000,000
17,000,000
2,000,000
20,000,000
Disposal with a partial year
depreciation
• Mike Company purchased an asset on March 31, 2009
at a cost of $150,000. It was expected to have a 5 year
useful life and a $30,000 residual value. The company
uses straight-line depreciation. On November 1, 2012
the company sold the asset for $60,000.
• Prepare the journal entry to record the sale of this
asset on November 1, 2012.
• How would your answer be different if the company
had used Double Declining Balance depreciation rather
than straight-line? Prepare the journal entry.