CHAPTER 11
Depreciation, Impairments, and Depletion
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Depreciation methods;
meaning of depreciation;
choice of depreciation
methods.
1, 2, 3, 4, 5,
6, 10, 14,
20, 21, 22
1, 2, 3, 4, 5,
8, 14, 15, 6
1, 2, 3
1, 2, 3, 4, 5
2.
Computation of
depreciation.
7, 8, 9, 13
1, 2, 3, 4
1, 2, 3, 4,
5, 6, 7,8
10, 15
1, 2, 3,
4, 8, 10,
11, 12
1, 2, 3, 5
Depreciation base.
6, 7
5
8, 14
1, 2, 8, 10
3
Errors; changes in
estimate.
7
11, 12,
13, 14
3, 4
3
Depreciation of partial
periods.
2, 3, 4
3, 4, 5, 6,
7, 15
1, 2, 3,4,5
10, 11
Composite method.
11, 12
6
9
2
Impairment of value.
16, 17,
18, 19
8
16, 17, 18
9
Depletion.
22, 23, 24,
25, 26, 27
9
19, 20, 21,
22, 23
5, 6, 7
Ratio analysis.
Tax depreciation
(MACRS).
25, 26
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe depreciation
concepts and methods of
depreciation.
1, 2, 3, 4, 6, 7,
8, 9, 10, 20, 21
1, 2, 3, 4, 5
1, 2, 3, 4, 5, 6,
7, 10, 11, 12,
13, 14, 16
1, 2, 3,
4, 5, 7, 8,
10, 11, 12
1, 2, 3, 4
2. Discuss special depreciation
methods and other
depreciation issues.
14, 15, 20, 21
6, 7
3,4, 5, 6, 7, 8,
9, 11, 12, 13,
1, 2, 3, 4,
10, 11
2,5
related to asset impairment.
16, 17, 18, 19
8
16, 17, 18
9
4. Explain the accounting
procedures for depletion of
natural resources.
22, 23, 24, 25,
26, 27
9
19, 20, 21,
22, 23
5, 6, 7
equipment, and natural
resources.
of depreciation.
25, 26
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E11.1
Depreciation computations—SL, SYD, DDB.
Simple
15–20
E11.2
Depreciation—conceptual understanding.
Moderate
20–25
E11.3
Depreciation computations—SYD, DDB—partial
periods.
Simple
15–20
E11.4
Depreciation computations—five methods.
Simple
15–25
E11.5
Depreciation computations—four methods.
Simple
20–25
E11.6
Depreciation computations—five methods, partial
periods.
20–30
E11.7
Different methods of depreciation.
Simple
25–35
E11.8
Depreciation computation—replacement, nonmonetary
20–25
E11.9
Composite depreciation.
Simple
15–20
E11.10
Depreciation computations, SYD.
Simple
10–15
E11.11
Depreciation—change in estimate.
Simple
10–15
E11.12
Depreciation computation—addition, change in
estimate.
Simple
20–25
E11.13
Depreciation—replacement, change in estimate.
Simple
15–20
E11.14
Error analysis and depreciation, SL and SYD.
Moderate
20–25
E11.15
Depreciation for fractional periods.
Moderate
25–35
E11.16
Impairment.
Simple
10–15
E11.17
Impairment.
Simple
15–20
E11.18
Impairment.
15–20
E11.19
Depletion computations—timber.
Simple
15–20
E11.20
Depletion computations—oil.
Simple
10–15
E11.21
Depletion computations—timber.
Simple
15–20
E11.22
Depletion computations—mining.
Simple
15–20
E11.23
Depletion computations—minerals.
Simple
15–20
E11.24
Ratio analysis.
Moderate
15–20
Book vs. tax (MACRS) depreciation.
Moderate
20–25
Book vs. tax (MACRS) depreciation.
Moderate
15–20
P11.1
Depreciation for partial period—SL, SYD, and DDB.
Simple
25–30
P11.2
Depreciation for partial periods—SL, Act., SYD, and
DDB.
Simple
25–35
P11.3
Depreciation—SYD, Act., SL, and DDB.
Moderate
40–50
P11.4
Depreciation and error analysis.
45–60
P11.5
Depletion and depreciation—mining.
Moderate
25–30
P11.6
Depletion, timber, and unusual loss.
Moderate
25–30
P11.7
Natural resources—timber.
Moderate
25–35
P11.8
Comprehensive fixed asset problem.
Moderate
25–35
P11.10
Comprehensive depreciation computations.
45–60
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P11.11
Depreciation for partial periods—SL, Act., SYD,
and DDB.
Moderate
30–35
*P11.12
Depreciation—SL, DDB, SYD, Act., and MACRS.
Moderate
25–35
CA11.1
Depreciation basic concepts.
Moderate
25–35
CA11.2
Unit, group, and composite depreciation.
20–25
CA11.3
Depreciation—strike, units-of-production, obsolescence.
Moderate
25–35
CA11.4
Moderate
25–35
CA11.5
Depreciation choice—ethics.
Moderate
20–25
ANSWERS TO QUESTIONS
1. The differences among the terms depreciation, depletion, and amortization are that they imply a
cost allocation of different types of assets. Depreciation is employed to indicate that tangible plant
2. The factors relevant in determining the annual depreciation for a depreciable asset are the initial
recorded amount (cost), estimated salvage value, estimated useful life, and depreciation method.
Assets are typically recorded at their acquisition cost, which is in most cases objectively determinable.
But cost assignment in other cases—“basket purchases” and the selection of an implicit interest rate in
asset acquisitions under deferred-payment plans—may be quite subjective, involving considerable
3. Disagree. Accounting depreciation is defined as an accounting process of allocating the costs of
4. The carrying value of a fixed asset is its cost less accumulated depreciation. If the company estimates
that the asset will have an unrealistically long life, the result will be to lower periodic depreciation
5. A change in the amount of annual depreciation recorded does not change the facts about the decline
in economic usefulness. It merely changes reported figures. Depreciation in accounting consists of
allocating the cost of an asset over its useful life in a systematic and rational manner. Abnormal
obsolescence, as suggested by the plant manager, would justify more rapid depreciation, but
increasing the depreciation charge would not necessarily result in funds for replacement. It would
not increase revenue but simply make reported income lower than it would have been, thus
preventing overstatement of net income.
Questions Chapter 11 (Continued)
Recording depreciation on the books does not set aside any assets for eventual replacement of
the depreciated assets. Fund segregation can be accomplished but it requires additional managerial
action. Unless an increase in depreciation is accompanied by an increase in sales price of the
product, or unless it affects management’s decision on dividend policy, it does not affect funds.
Ordinarily higher depreciation will not lead to higher sales prices and thus to more rapid
“recovery” of the cost of the asset, and the economic factors present would have permitted this
6. Assets are retired for one of two reasons: physical factors or economic factors—or a combination
of both. Physical factors are the wear and tear, decay, and casualty factors which hinder the asset
from performing indefinitely. Economic factors can be interpreted to mean any other constraint that
develops to hinder the service life of an asset. Some accountants attempt to classify the economic
7. Before the amount of the depreciation charge can be computed, three basic questions must be
answered:
(1) What is the depreciation base to be used for the asset?
8.
Cost
$800,000
Cost
$800,000
Depreciation rate
X .30*
Depreciation for 2020
(240,000)
Depreciation for 2020
$240,000
Undepreciated cost in 2021
560,000
Depreciation rate
Depreciation for 2021
Accumulated depreciation
at December 31, 2021
Questions Chapter 11 (Continued)
9.
Depreciation base:
Cost
$162,000
Straight-line, $147,000 ÷ 20 =
$ 7,350
Salvage
(15,000)
$147,000
20,000
84,000
14,300
10. From a conceptual point of view, the method which best matches revenue and expenses should
be used; in other words, the answer depends on the decline in the service potential of the asset. If
the service potential decline is faster in the earlier years, an accelerated method would seem to be
11. The composite method is appropriate for a company which owns a large number of heterogeneous
plant assets and which would find it impractical to keep detailed records for them.
The principal advantage is that it is not necessary to keep detailed records for each plant asset in
12. Cash ……………………………………………………………………………………… 14,000
Accumulated Depreciation—Plant Assets ……………………………………. 36,000
13. Original estimate: $2,500,000 ÷ 50 = $50,000 per year
Depreciation to January 1, 2021: $50,000 X 14 = $700,000
Questions Chapter 11 (Continued)
14. No, depreciation does not provide cash; revenues do. The funds for the replacement of the assets
come from the revenues; without the revenues no income materializes and no cash inflow results.
15. 1.0 ÷ 4 years = 25% straight-line rate X 2 = 50%* double-declining rate
$8,000 X 50%* = $4,000 Depreciation for first full year.
16. The accounting standards require that if events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable, then the carrying amount of the asset
should be assessed. The assessment or review takes the form of a recoverability test that
17. Under U.S. GAAP, impairment losses on assets held for use may not be restored.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
18. An impairment is deemed to have occurred if, in applying the recoverability test, the carrying
amount of the asset exceeds the expected future net cash flows from the asset. In this case, the
19. Impairment losses are reported as part of income from continuing operations, generally in the “Other
expenses and losses” section. Impairment losses (and recovery of losses for assets to be disposed
20. In a decision to replace or not to replace an asset, the undepreciated cost of the old asset is not a
factor to be considered. Therefore, the decision to replace plant assets should not be affected by
the amount of depreciation that has been recorded. The relative efficiency of new equipment as
Questions Chapter 11 (Continued)
If depreciation rates were higher it might be true that a business would be financially more able to
replace assets, since during the earlier years of the asset’s use a larger portion of its cost would
have been charged to expense, and hence during this period a smaller amount of income tax paid.
21. In lieu of recording depreciation on replacement costs, management might elect to make annual
appropriations of retained earnings in contemplation of replacing certain facilities at higher price
levels. Such appropriations might help to eliminate misunderstandings as to amounts available for
22. (a) Depreciation and cost depletion are similar accounting concepts in that:
1. The cost of the asset is the starting point from which computation of the amount of the
periodic charge to operations is made.
(b) Depreciation and cost depletion are dissimilar accounting concepts in that:
1. Depletion is almost always based on output whereas depreciation is usually based on time.
2. Many formulas are used in computing depreciation but only one is used to any extent in
Questions Chapter 11 (Continued)
23. Cost depletion is the procedure by which the capitalized costs, less residual land values, of a natural
resource are systematically charged to operations. The purpose of this procedure is to match the
cost of the resource with the revenue it generates. The usual method is to divide the total cost less
residual value by the estimated number of recoverable units to arrive at a depletion charge for
each unit removed. A change in the estimate of recoverable units will necessitate a revision of the
24. Percentage depletion does not necessarily measure the proper share of the cost of a natural resource
25. The maximum dividend permissible is the amount of accumulated net income (after depletion) plus
the amount of depletion charged. This practice can be justified for companies that expect to extract
26. Reserve recognition accounting (RRA) is the method (a fair value approach) that was proposed by
Questions Chapter 11 (Continued)
The oil companies are concerned because the valuation issue is extremely tenuous. For example, to
27. Using full-cost accounting, the cost of unsuccessful ventures as well as those that are successful is
capitalized, because a cost of drilling a dry hole is a cost that is needed to find the commercially
28. Asset turnover:
Return on assets:
*29. The modified accelerated cost recovery system (MACRS) has been adopted by the Internal
Revenue Service. It applies to depreciable assets acquired in 1987 and later. MACRS eliminates
the need to determine each asset’s useful life. The selection of a depreciation method and a salvage
value is also unnecessary under MACRS. The taxpayer determines the recovery deduction for an
asset by applying a statutory percentage to the historical cost of the property. MACRS was adopted
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11.1
2020:
($50,000 – $2,000) X 23,000
= $6,900
160,000
2021:
($50,000 – $2,000) X 31,000
= $9,300
160,000
BRIEF EXERCISE 11.2
(a)
$80,000 – $8,000
= $9,000
8
(b)
BRIEF EXERCISE 11.3
(a) ($80,000 – $8,000) X 8/36* = $16,000
BRIEF EXERCISE 11.4
(a) $80,000 X .25* = $20,000
BRIEF EXERCISE 11.5
BRIEF EXERCISE 11.6
Asset
Depreciation Expense
A
($70,000 – $7,000)/10 =
$ 6,300
BRIEF EXERCISE 11.7
Annual depreciation expense: ($8,000 – $1,000)/5 = $1,400
BRIEF EXERCISE 11.8
Recoverability test:
Future net cash flows ($500,000) < Carrying amount ($520,000*);
BRIEF EXERCISE 11.9
Inventory ………………………………………………………………..
73,500**
Coal Mine ……………………………………………………….
73,500
BRIEF EXERCISE 11.10
(a) Asset turnover:
$7,890
= 1.0139* times
($7,837 + $7,726)
2
2
*BRIEF EXERCISE 11.11
2020:
$50,000 X 20%
=
$10,000
2021:
$50,000 X 32%
=
16,000
2022:
$50,000 X 19.2%
=
2023:
$50,000 X 11.52%
=
2024:
$50,000 X 11.52%
=
2025:
$50,000 X 5.76%
=
2,880
SOLUTIONS TO EXERCISES
EXERCISE 11.1 (15–20 minutes)
(a) Straight-line method depreciation for each of Years 1 through 3 =
($469,000 – $40,000)
= $35,750
12
(b)
= 78
(c)
Double-Declining Balance method =
(depreciation rate)
1.0
X 2 = 16.67%
12
EXERCISE 11.2 (20–25 minutes)
(a) If there is any salvage value and the amount is unknown (as is the
case here), the cost would have to be determined by looking at the
data for the double-declining balance method.
5
EXERCISE 11.2 (Continued)
(c) The highest charge to income for Year 1 will be yielded by the double-
declining balance method, with depreciation expense of $20,000.
(d) The highest charge to income for Year 4 will be yielded by the
straight-line method with depreciation expense of $9,000.
EXERCISE 11.3 (15–20 minutes)
(a)
[20 (20 + 1)]
= 210
2
EXERCISE 11.3 (Continued)
(b)
1.0
= 5% Straight-line rate; .05 X 2 = 10% Double declining balance rate
20
EXERCISE 11.4 (15–25 minutes)
(a) $315,000 – $15,000 = $300,000* Depreciable base; $300,000 ÷ 10 yrs. =
$30,000
(d)
(10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1) = 55 OR
n(n + 1)
=
[10(10 + 1)] =
55
2
2
10
X $300,000 X 4/12 =
$18,182
55
X $300,000 X 8/12 =
EXERCISE 11.5 (20–25 minutes)
(a)
($117,900 – $12,900)
= $21,000/yr. = $21,000 X 5/12 = $8,750
5
2020 Depreciation—Straight line = $8,750
(c)
Machine
Allocated to
Year
Total
2020
2021
1
5/15 X $105,000* = $35,000
$14,583**
$20,417***
[5 x (5 + 1)] / 2
(d) 2020 .40 X ($117,900) X 5/12 = $19,650
2021 .40 X ($117,900 – $19,650) = $39,300
7/12 X $47,160 =
EXERCISE 11.6 (20–30 minutes)
(a)
2020
Straight-line
$212,000 – $12,000
= $25,000/year
8
(b)
2020
Output
$212,000 – $12,000
= $5.00/output unit
1,000 units X $5.00 = $5,000
(c)
2020
Working hours
$212,000 – $12,000
= $10.00/hour
20,000
525 hours X $10.00 = $5,250
(d)
(8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 )= 36 OR
=
= 36
Allocated to
Sum-of-the-years’-digits
Total
2020
2021
2022
Year 1
8/36 X $200,000 =
$44,444
$11,111a
$33,333b
7/36 X $200,000 =
$38,889
6/36 X $200,000 =
$33,333
$11,111
(e) Double-declining balance 2021: 1.0/8 X 2 = 25%.
2020: .25 X $212,000 X 3/12 = $13,250