11-1
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
1, 2, 3
1, 2, 3, 4, 5
4.
Errors; changes in
estimate.
13
7
11, 12,
13, 14
3, 4
3
5.
Depreciation of partial
periods.
15
2, 3, 4
3, 4, 5, 6,
7, 15
1, 2, 3,
10, 11
6.
Composite method.
11, 12
6
9
2
Impairment of value.
16, 17, 18,
19, 29, 30,
31, 32
8
16, 17, 18
9
8.
Depletion.
22, 23, 24,
25, 26, 27
9
19, 20, 21,
22, 23
5, 6, 7
9.
Ratio analysis.
28
10
24
Tax depreciation
(MACRS).
33
11
25, 26
12
Computation of
depreciation.
7, 8, 9, 13
1, 2, 3, 4
1, 2, 3, 4,
5, 6, 7,
10, 15
1, 2, 3,
4, 8, 10,
11, 12
1, 2, 3
3.
Depreciation base.
6, 7
5
8, 14
1, 2, 3,
8, 10
3
11-2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
1. Explain the concept of depreciation.
4. Explain special depreciation methods.
6, 7
9, 11, 12, 13
5. Explain the accounting issues related to asset
impairment.
8
16, 17, 18
9
6. Explain the accounting procedures for
depletion of natural resources.
9
19, 20, 21,
22, 23
5, 6, 7
7. Explain how to report and analyze property,
plant, equipment, and natural resources.
25, 26
7, 8, 9, 10, 11,
12, 13, 14, 15
4, 8, 10,
11, 12
7, 8, 10, 11, 12,
13, 14, 15
5, 8, 10,
11, 12
11-3
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
E11-9
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.
Simple
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
*E11-25
Book vs. tax (MACRS) depreciation.
Moderate
20–25
*E11-26
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 extraordinary loss.
Moderate
25–30
P11-7
Natural resources—timber.
Moderate
25–35
P11-8
Comprehensive fixed asset problem.
Moderate
25–35
P11-9
Impairment.
Moderate
15–25
P11-10
Comprehensive depreciation computations.
45–60
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.
Moderate
20–30
E11-7
Different methods of depreciation.
Simple
25–35
exchange.
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
Depreciation concepts.
Moderate
25–35
CA11-5
Depreciation choice—ethics.
Moderate
20–25
11-5
SOLUTIONS TO CODIFICATION EXERCISES
CE11-1
(a) The master glossary provides two entries for amortization:
Amortization
The process of reducing a recognized liability systematically by recognizing revenues or reducing
Amortization
The process of reducing a recognized liability systematically by recognizing revenues or by
CE11-2
According to FASB ASC 360-10–40-4 through 6 (Impairment or Disposal of Long-Lived Assets . . .
Long-Lived Assets to Be Exchanged or to Be Distributed to Owners in a Spinoff):
40-4 For purposes of this Subtopic, a long-lived asset to be disposed of in an exchange measured
based on the recorded amount of the nonmonetary asset relinquished or to be distributed to
owners in a spinoff is disposed of when it is exchanged or distributed. If the asset (asset group)
CE11-2 (Continued)
40-5 A gain or loss not previously recognized that results from the sale of a long-lived asset
(disposal group) shall be recognized at the date of sale.
CE11-3
According to FASB ASC 360-10–35-1 through 10 (Subsequent Measurement):
35-2 This guidance addresses the concept of depreciation accounting and the various factors to
consider in selecting the related periods and methods to be used in such accounting.
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 (GAAP) require that this cost be spread
35-5 See paragraph 360–10–35–20 for a discussion of depreciation of a new cost basis after recognition
of an impairment loss.
35-6 See paragraph 360–10–35–43 for a discussion of cessation of deprecation on long-lived assets
classified as held for sale.
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 revenue-earning power of the
55-8 In practice, experience regarding loss or damage to depreciable assets is in some cases one of the
factors considered in estimating the depreciable lives of a group of depreciable assets, along with
such other factors as wear and tear, obsolescence, and maintenance and replacement policies.
11-7
CE11-4
According to FASB ASC 210-10-S99 (Balance Sheet-Overall-SEC Materials)
S99-1 The following is the text of Regulation S-X Rule 5–02, Balance Sheets.
Assets And Other Debits
13. Property, plant and equipment.
– (a) State the basis of determining the amount.
14. Accumulated depreciation, depletion, and amortization of property, plant and equipment.
The amount is to be set forth separately in the balance sheet or in a note thereto.
11-8
ANSWERS TO QUESTIONS
1. The differences among the terms depreciation, depletion, and amortization are that they imply a
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
judgment.
Selecting the depreciation method is generally a judgment decision, but a method may be inherent
in the definition adopted for the units of service life, as discussed earlier. For example, if such units
are machine hours, the method is a function of the number of machine hours used during each
period. A method should be selected that will best measure the portion of services expiring each
period. Once a method is selected, it may be objectively applied by using a predetermined, objec–
tively derived formula.
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
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
11-9
Questions Chapter 11 (Continued)
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 higher price
regardless of the excuse given or the particular rationalization used. The price could have been
increased without a higher depreciation charge.
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
7. Before the amount of the depreciation charge can be computed, three basic questions must be
answered:
8.
Cost
$800,000
Cost
$800,000
Depreciation rate
X 30%*
Depreciation for 2012
(240,000)
Depreciation for 2012
$240,000
Undepreciated cost in 2013
560,000
2012 Depreciation
$240,000
Depreciation for 2013
Questions Chapter 11 (Continued)
9.
Depreciation base:
Cost
$162,000
Straight-line, $147,000 ÷ 20 =
$ 7,350
Salvage
(15,000)
$147,000
Units-of-output,
$147,000
X 20,000 =
$35,000
84,000
Working hours,
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.
12. Cash ……………………………………………………………………………………… 14,000
Accumulated Depreciation—Plant Assets ……………………………………. 36,000
Plant Assets …………………………………………………………….. 50,000
No gain or loss is recognized under the composite method.
13. Original estimate: $2,500,000 ÷ 50 = $50,000 per year
Depreciation to January 1, 2013: $50,000 X 24 = $1,200,000
Depreciation in 2013 ($2,500,000 – $1,200,000) ÷ 15 years = $86,667
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.
11–11
Questions Chapter 11 (Continued)
15. 25% straight-line rate X 2 = 50% double-declining rate
$8,000 X 50% = $4,000 Depreciation for first full year.
$4,000 X 6/12 = $2,000 Depreciation for half a year (first year), 2012.
$6,000 X 50% = $3,000 Depreciation for 2013.
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.
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
compared with that presently in use, the cost of the new facilities, the availability of capital for the
new asset, etc., are the factors entering into the decision. Normally, the fact that the asset had
11–12
Questions Chapter 11 (Continued)
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
22. (a) Depreciation and cost depletion are similar in the accounting sense 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.
2. The estimated life is based on economic or productive life.
3. The accumulated total of past charges to operations is deducted from the original cost of
(b) Depreciation and cost depletion are dissimilar in the accounting sense 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
computing depletion.
3. Depletion applies to natural resources while depreciation applies to plant and equipment.
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
unit charge.
Questions Chapter 11 (Continued)
Percentage depletion is the procedure, authorized by the Internal Revenue Code, by which a certain
percentage of gross income is charged to operations in arriving at taxable income. Percentage
24. Percentage depletion does not necessarily measure the proper share of the cost of land to be charged
to expense for depletion and, in fact, may ultimately exceed the actual cost of the property.
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
natural resources and not purchase additional properties. In effect, such companies are distributing
gradually to stockholders their original investments.
26. Reserve recognition accounting (RRA) is the method that was proposed by the SEC to account for
oil and gas resources. Proponents of this approach argue that oil and gas should be valued at the
date of discovery. The value of the reserve still in the ground is estimated and this amount,
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 ratio:
$63.4
= 1.4 times
$44.3
Rate of return on assets:
= 5.6%
11–14
Questions Chapter 11 (Continued)
*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
11–15
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1
2012:
($50,000 – $2,000) X 23,000
= $6,900
160,000
2013:
($50,000 – $2,000) X 31,000
= $9,300
160,000
BRIEF EXERCISE 11-3
(a) ($80,000 – $8,000) X 8/36* = $16,000
(b) [($80,000 – $8,000) X 8/36] X 9/12 = $12,000
*[8(8 + 1)] ÷ 2
$80,000 – $8,000
= $9,000
11–16
BRIEF EXERCISE 11-6
Asset
Depreciation Expense
A
($70,000 – $7,000)/10 =
$ 6,300
B
($50,000 – $5,000)/5 =
9,000
C
($82,000 – $4,000)/12 =
6,500
$21,800
BRIEF EXERCISE 11-7
Annual depreciation expense: ($8,000 – $1,000)/5 = $1,400
Book value, 1/1/13: $8,000 – (2 x $1,400) = $5,200
Depreciation expense, 2013: ($5,200 – $500)/2 = $2,350
BRIEF EXERCISE 11-8
Loss on Impairment ………………………………………………..
BRIEF EXERCISE 11-9
Inventory ……………………………………………………….……….
73,500
Coal Mine ……………………………………………………….
73,500
$400,000 + $100,000 + $80,000 – $160,000
11–17
BRIEF EXERCISE 11-10
(a) Asset turnover ratio:
$7,586
= 1.211 times
$6,056 + $6,474
2
*BRIEF EXERCISE 11-11
2012:
$50,000 X 20%
=
$10,000
2013:
$50,000 X 32%
=
16,000
2014:
$50,000 X 19.2%
=
2015:
$50,000 X 11.52%
=
2016:
$50,000 X 11.52%
=
2017:
$50,000 X 5.76%
=
= 9.70%
2.
SOLUTIONS TO EXERCISES
EXERCISE 11-1 (15–20 minutes)
(a) Straight-line method depreciation for each of Years 1 through 3 =
$518,000 – $50,000
= $39,000
12
11/78 X ($518,000 – $50,000) = $66,000
depreciation Year 2
10/78 X ($518,000 – $50,000) = $60,000
depreciation Year 3
(c)
Double-Declining-Balance method
depreciation rate.
100%
X 2 = 16.67%
12
$518,000 X 16.67% =
$86,351 depreciation Year 1
($518,000 – $86,351) X 16.67% =
$71,956 depreciation Year 2
($518,000 – $86,351 – $71,956) X 16.67% =
$59,961 depreciation Year 3
EXERCISE 11-2 (20–25 minutes)
11–19
EXERCISE 11-2 (Continued)
(b) $50,000 cost [from (a)] – $45,000 total depreciation = $5,000 salvage
value.
Computations:
St.-line = $50,000 – ($9,000 + $9,000 + $9,000) = $23,000 book value,
end of Year 3.
S.Y.D. = $50,000 – ($15,000 + $12,000 + $9,000) = $14,000 book value,
end of Year 3.
D.D.B. = $50,000 – ($20,000 + $12,000 + $7,200) = $10,800 book value,
end of Year 3.
EXERCISE 11-3 (15–20 minutes)
(a)
20 (20 + 1)
= 210
2
EXERCISE 11-3 (Continued)
(b)
100%
= 5%; 5% X 2 = 10%
20
EXERCISE 11-4 (15–25 minutes)
(a) $279,000 – $15,000 = $264,000; $264,000 ÷ 10 yrs. = $26,400
(b) $264,000 ÷ 240,000 units = $1.10; 25,500 units X $1.10 = $28,050
(c) $264,000 ÷ 25,000 hours = $10.56 per hr.; 2,650 hrs. X $10.56 = $27,984
10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 OR
X $264,000 X 1/3 =
X $264,000 X 2/3 =
Total for 2013
$44,800
(e)
$279,000 X 20% X 1/3 =
$18,600
[$279,000 – ($279,000 X 20%)] X 20% X 2/3 =