Question 11–1
The terms depreciation, depletion, and amortization all refer to the process of
Question 11–2
The term depreciation often is confused with a decline in value or worth of an
Question 11–3
The process of cost allocation for plant and equipment and finite-life intangible
assets requires that three factors be established at the time the asset is put into use.
Question 11–4
Physical life provides the upper bound for service life. Physical life will vary
according to the purpose for which the asset is acquired and the environment in which
Chapter 11 Property, Plant, and Equipment and
Intangible Assets: Utilization and Impairment
QUESTIONS FOR REVIEW OF KEY TOPICS
11–2 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 11–5
The total amount of depreciation to be recorded during an asset’s service life is
Question 11–6
Activity-based allocation methods estimate service life in terms of some measure
Question 11–7
The straight-line depreciation method allocates an equal amount of depreciable
Question 11–8
Theoretically, the use of activity-based depreciation methods would provide a
better matching of revenues and expenses. Clearly, the productivity of a plant asset is
Answers to Questions (continued)
Question 11–9
Companies might use the straight-line method because they consider that the
benefits derived from the majority of plant assets are realized approximately evenly
Question 11–10
The group approach to aggregation is applied to a collection of depreciable assets
that share similar service lives and other attributes. For example, group depreciation
Question 11–11
The allocation of the cost of a natural resource to periods of use is called
Question 11–12
The amortization of finite-life intangible assets is based on the same concepts as
depreciation and depletion. The capitalized cost of an intangible asset that has a finite
Answers to Questions (continued)
Question 11–13
A company can calculate depreciation based on the actual number of days or
Question 11–14
A change in the service life of plant and equipment and finite-life intangible
Question 11–15
A change in depreciation method is accounted for prospectively by simply
depreciating the remaining depreciable base of the asset (book value at date of change
Answers to Questions (continued)
Question 11–16
If a material error is discovered in an accounting period subsequent to the period
in which the error is made, previous years’ financial statements that were incorrect as
Question 11–17
Impairment of the value of property, plant, and equipment and intangible assets
results when there has been a significant decline in value below book value. For
property, plant, and equipment and intangible assets with finite useful lives, GAAP
11–6 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 11–18
Repairs and maintenance are expenditures made to maintain a given level of
benefits provided by the asset and do not increase future benefits. Expenditures for
Question 11–19
IFRS allows a company to value property, plant, and equipment (PP&E) and
Question 11–20
Under U.S. GAAP, an impairment loss for property, plant, and equipment and
Answers to Questions (concluded)
Question 11–21
Under U.S. GAAP, the measurement of an impairment loss for goodwill is a two–
step process. In step one, we compare the fair value of the reporting unit with its book
Question 11–22
Under IFRS, litigation costs to successfully defend an intangible right are
expensed, except in rare situations when the expenditure increases future benefits.
11–8 Intermediate Accounting, 8/e
Brief Exercise 11–1
Depreciation is a process of cost allocation, not valuation. Koeplin should not
BRIEF EXERCISES
Brief Exercise 11–2
a. Straight-line:
b. Sum-of-the–years’ digits:
Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10
c. Double-declining balance:
Straight-line rate is 25% (1 ÷ 4 years) x 2 = 50% DDB rate
d. Units-of-production:
11–10 Intermediate Accounting, 8/e
Brief Exercise 11–3
a. Straight-line:
$30,000 – 2,000
= $7,000 per year
b. Sum-of-the–years’ digits:
Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10
c. Double-declining balance:
Straight-line rate is 25% (1 ÷ 4 years) x 2 = 50% DDB rate
Brief Exercise 11–4
Annual depreciation will equal the group rate multiplied by the original cost of
the group:
Journal entry (not required):
Brief Exercise 11–5
$8,250,000
Depletion per foot = = $2.75 per foot
3,000,000 cubic feet
11–12 Intermediate Accounting, 8/e
Brief Exercise 11–6
Expenses for the year include:
Amortization of the patent † = $400,000
Amortization of the developed technology* = 300,000
Total $700,000
Brief Exercise 11–7
Calculation of annual depreciation after the estimate change:
$9,000,000 Cost
$320,000 Previous annual depreciation ($8 million ÷ 25 years)
x 2 years 640,000 Depreciation to date (2014–2015)
Brief Exercise 11–8
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change in
Asset’s cost $9,000,000
Accumulated depreciation to date* (640,000)
Undepreciated cost, Jan. 1, 2016 $8,360,000
x 2/23 †
11–14 Intermediate Accounting, 8/e
Brief Exercise 11–9
If a material error is discovered in an accounting period subsequent to the period
in which the error is made, previous years’ financial statements that were incorrect as
In this case, depreciation of $32,000 should have been $320,000 ($8,000,000
25 years). Therefore, 2014 income before tax is overstated by $288,000 ($320,000 –
32,000) and accumulated depreciation is understated by the same amount. The
Brief Exercise 11–10
Because the undiscounted sum of future cash flows of $28 million exceeds book
value of $26.5 million, there is no impairment loss.
Brief Exercise 11–11
Because the undiscounted sum of future cash flows of $24 million is less than
book value of $26.5 million, there is an impairment loss. The impairment loss is
calculated as follows:
Brief Exercise 11–12
Under IFRS, the impairment loss is the difference between book value and the
recoverable amount. The recoverable amount is $22 million, the higher of the value–
in-use of $22 million (present value of estimated future cash flows) and the $21
million fair value less costs to sell.
Brief Exercise 11–13
Recoverability: Because the book value of SCC’s net assets of $42 million
exceeds the fair value of $40 million, an impairment loss is indicated.
Determination of implied fair value of goodwill:
Fair value of SCC $40 million
Brief Exercise 11–14
Brief Exercise 11–15
Under IFRS, the impairment loss is the difference between book value and the
Brief Exercise 11–16
Annual maintenance on machinery, $5,400—This is an example of normal
repairs and maintenance. Future benefits are not increased; therefore, the
expenditure should be expensed in the period incurred.
Remodeling of offices, $22,000—This is an example of an improvement. The
Exercise 11–1
1. Straight-line:
2. Sum-of-the-years’ digits:
Year
Depreciable
Base
X
Depreciation
Rate per Year
=
Depreciation
2016
$30,000
2017
4
3
2020
1
5
$10,000
EXERCISES
11–18 Intermediate Accounting, 8/e
Exercise 11–1 (concluded)
3. Double-declining balance:
Straight-line rate of 20% (1 ÷ 5 years) x 2 = 40% DDB rate.
Year
Book Value
Beginning
of Year X
Depreciation
Rate per
Year =
Book Value
End of Year
2016
$33,000
40%
$19,800
2017
40%
2018
40%
2019
40%
2020
3,000
* Amount necessary to reduce book value to residual value
4. Units-of-production:
$33,000 – 3,000
= $.30 per mile depreciation rate
100,000 miles
Year
Actual
Miles
Driven X
Depreciation
Rate per
Mile =
Book Value
End of
Year
2016
22,000
$.30
$26,400
2017
2018
2020
102,000
Exercise 11–2
1. Straight-line:
2. Sum-of-the-years’ digits:
Sum-of-the-digits is ([10 (10 + 1)] ÷ 2) = 55
2017 $110,000 x 9/55 = $18,000
3. Double-declining balance:
Straight-line rate is 10% (1 ÷ 10 years) x 2 = 20% DDB rate
4. One hundred fifty percent declining balance:
5. Units-of-production:
$115,000 – 5,000
Exercise 11–3
1. Straight-line:
$115,000 – 5,000
2. Sum-of-the-years’ digits:
Sum-of–the-digits is {[10 (10 + 1)]/2} = 55
3. Double-declining balance:
Straight-line rate is 10% (1 ÷ 10 years) x 2 = 20% DDB rate
4. One hundred fifty percent declining balance:
Straight-line rate is 10% (1 ÷ 10 years) x 1.5 = 15% rate