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Chapter 11
(a)
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Depreciation and Impairment
Date: January 18, 2013
According to FASB ASC 360-10-35-4:
The cost of a productive facility is one of the costs of the services it renders
during its useful economic life. Generally accepted accounting principles require
The general concept of depreciation is a method of cost allocation, rather than
asset valuation. The definition of depreciation is the process of allocating costs of
tangible assets to an expense in those periods expected to benefit from the use
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(b) See the table below, excerpted from the spreadsheet.
Year
Asset
Cost
Accumulated
Depreciation
Book
Value Rate*
Depreciation Expense
1 $440,000 $440,000 25% $110,000
2 440,000 $110,000 330,000 25% 82,500
3 440,000 192,500 247,500 25% 61,875
Year 3 Journal Entry:
Depreciation Expense 61,875
Accumulated Depreciation Equipment
61,875
**8,733 depreciation expense in final
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(c) According to FASB ASC 360-10-35-7:
The declining-balance method is an example of one of the methods that meet the
requirements of being systematic and rational. If the expected productivity or
In industries where obsolescence due to the development of new technology is
straight-line depreciation is preferred because the decline in usefulness is simply
One argument for using an accelerated method is that an asset is most
productive and thus generates greater revenue in the early years, and thus the
early years should bear the greatest cost. Another argument for using an
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(d) FASB ASC 360-10- the condition that
exists when the carrying amount of a long-lived asset (asset group) exceeds its
fair value. FASB ASC 360-10-35-21 identifies the following circumstances that
indicate an asset or asset group should be reviewed for impairment:
A significant decrease in the market price of a long-lived asset (asset group)
A significant adverse change in the extent or manner in which a long-lived asset
(asset group) is being used or in its physical condition
To determine if a long-lived asset is impaired, the first step is to estimate the
and eventual disposal. If this amount is less than the carrying value of the asset,
an impairment loss is recognized to write down the asset to its fair value. The
–
impairment net book value. This loss on impairment is reported as a component
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Additional Activities: Extend your accounting knowledge
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Impairments and Earnings Management
Date: January 18, 2013
There is room for manipulation of income through the recognition of impairments.
A company can incur a large write-off in one year and show an increase in future
Examples of companies with large asset impairments:
In connection with store closings, Blockbuster recorded significant asset impairment
charges of $35.9 million and $20.4 million on its property and equipment in fiscal
In the Altria Group, Inc. 2004 Annual Report it was reported that during 2004, Kraft
recorded $603 million of asset impairment and exit costs on the consolidated
statement of earnings. These pre-tax charges were composed of $583 million of costs
under the restructuring program, $12 million of impairment charges relating to
In its third quarter, 2003, Eastman Chemical Company recorded a total of $496
million in charges against its bottom line. Of that, $482 million consisted of non-cash
asset impairments, representing a decline in value of the company’s capital and
intangible assets. “The non-cash asset impairments of $482 million for third quarter
reflect adjustments to the company’s balance sheet and do not represent cash leaving
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the company,” said Eastman spokeswoman Nancy Ledford. (Source: www.sullivan-