# PRACTICE 11–1

RECORDING DEPRECIATION EXPENSE

Depreciation Expense...............................................................................
Accumulated Depreciation.................................................................
PRACTICE 11–2

1,000
1,000

COMPUTING STRAIGHT-LINE DEPRECIATION

1.

(\$115,000 – \$20,000)/5 years = \$19,000 annual depreciation expense

2.

Depreciation Expense........................................................................
Accumulated Depreciation..........................................................

3.

19,000
19,000

Book value: \$115,000 – \$19,000 = \$96,000

PRACTICE 11–3

COMPUTING SUM-OF-THE-YEARS’-DIGITS DEPRECIATION

1. and 2.
Year
1
2
3
4
5

Computation
(\$115,000 – \$20,000) ×
(\$115,000 – \$20,000) ×
(\$115,000 – \$20,000) ×
(\$115,000 – \$20,000) ×
(\$115,000 – \$20,000) ×

PRACTICE 11–4

(5/15)
(4/15)
(3/15)
(2/15)
(1/15)

Depreciation
Amount

Accumulated
Depreciation

Book
Value

\$31,667
25,333
19,000
12,667
6,333

\$31,667
57,000
76,000
88,667
95,000

\$83,333
58,000
39,000
26,333
20,000

COMPUTING DOUBLE-DECLINING-BALANCE DEPRECIATION

1. and 2.
Double-declining-balance percentage: (100%/4 years) × 2 = 50%
Year

Computation

Depreciation
Amount

Accumulated
Depreciation

Book
Value

1
2
3
4

\$100,000 × 0.50
\$50,000 × 0.50
\$25,000 × 0.50
\$12,500 – \$10,000

\$50,000
25,000
12,500
2,500

\$50,000
75,000
87,500
90,000

\$50,000
25,000
12,500
10,000

The depreciation amount in the final year is the amount that reduces the machine’s
book value to equal the estimated residual value.

.000 50.........000 5. I = 9%.400 14.400 depletion expense 2.000 40. Rate per service hour: [(\$75. COMPUTING DEPLETION EXPENSE Depletion rate = (January 1 cost – Residual value)/January 1 tons (\$100..000 hours] = \$3 per hour Year Computation 9.157 Accretion expense: \$88....000)/20.... Depletion Expense...000 21...00 per ton = \$14..000 – \$20.000 units × 5.000 \$48..000 units × 2.000 25.000 15......000 \$55.. Accumulated Depletion (or Mine)..000 tons = \$16..884 = \$525.000 15.....000)/13..000 54.000 COMPUTING PRODUCTIVE-OUTPUT DEPRECIATION 1...........000 30.......2 Chapter 11 PRACTICE 11–5 COMPUTING SERVICE-HOURS DEPRECIATION 1.....884 Depreciation expense: \$613...09 = \$8.000 + \$88. N = 12 years → \$88.....884/12 years = \$51.000 \$15. and 2..884 The total cost of the landfill site is \$613.. Rate per unit: [(\$70...000 hours × 1 2 3 4 PRACTICE 11–6 \$3 per hour \$3 per hour \$3 per hour \$3 per hour Depreciation Amount Accumulated Depreciation Book Value \$27...000 20......000 units × PRACTICE 11–9 \$5 per unit \$5 per unit \$5 per unit \$5 per unit Depreciation Amount Accumulated Depreciation Book Value \$15.000 33.............000 12.. and 2...000 units × 3.000 15.000 – \$15.........000 PRACTICE 11–10 1........000)/5..400 ....884 × 0.000 60.000 – \$5.000 \$27.....000 42...000 units)] = \$5 per unit Year 1 2 3 4 Computation 3.000 65...000 hours × 4.000 ASSET RETIREMENT OBLIGATION The present value of the asset retirement obligation is computed as follows: FV = \$250...000 hours × 5.000 10... PRACTICE 11–11 CHANGE IN ESTIMATED LIFE 14...000.000 hours × 2...000 6.00 per ton 900 tons × \$16.

The relevant comparison is the book value of the asset to the sum of the expected future cash flows.200 PRACTICE 11–14 DETERMINING WHETHER A TANGIBLE ASSET IS IMPAIRED The equipment is not impaired.000 accumulated depreciation) – \$8.000 – \$67.000 × 40% = \$21.000 – \$27.000 Book value at the end of three years: \$80.000 = \$53.500 depletion expense 2.Annual depreciation using the original estimates: (\$40. Depletion rate for Year 2 = January 1 cost/January 1 tons (\$150.000 – \$8.000]/4 years = \$5.000 annual depreciation expense PRACTICE 11–12 1.000 Remaining useful life after three years: New estimate of 7 years – 3 years already elapsed = 4 years remaining Annual depreciation using the revised estimates in the fourth year: [(\$40. no impairment has occurred. the current value of the asset is .000 – \$12.500 + \$60.000 900.62 per ton = \$65.62 per ton 600 tons × \$109.000/2. Sum of future cash flows (\$65.00 per ton 900 tons × \$75.500.000) \$910. CHANGE IN ESTIMATED UNITS OF PRODUCTION Depletion rate for Year 1 = January 1 cost/January 1 tons \$150.000 tons = \$75. In testing for impairment.000)/(600 tons + 700 tons) = \$109.000 annual depreciation expense × 3 years = \$27.772 PRACTICE 11–13 CHANGE IN DEPRECIATION METHOD Annual depreciation using the original estimates: (\$80.00 per ton = \$67.000 annual depreciation expense Total accumulated depreciation after three years: \$9.000 annual depreciation expense Total accumulated depreciation after three years: \$4.000 Straight-line rate – 100%/5 = 20% Double the straight-line rate: 20% × 2 = 40% Year 4 depreciation expense: \$53.000 – \$4.000 – \$600.000 annual depreciation expense × 3 years = \$12.000 × 14 years) Book value (\$1.000)/8 years = \$9.000)/9 years = \$4.000 Because the sum of future cash inflows is more than the book value of the asset.

4 Chapter 11 not used.000. the equipment should continue to be reported in the company’s books at its net book value of \$900. . Therefore.

................................................................000 PRACTICE 11–16 RECORDING UPWARD ASSET REVALUATIONS Building (\$730. Accumulated Depreciation..............................000 PRACTICE 11–21 1.....................000 ...................................................... 340.500 \$250.................................000 Loss on Exchange (\$360.....................000 Building.000 Gain on Exchange (\$400.500 62...................000)............................000 Accumulated Depreciation.... 150 850 1...........................000 × 30 years) Book value (\$750...........000 2....000 Accumulated Depreciation...........000 Revaluation Equity Reserve................. Land............. 40......) PRACTICE 11–19 EXCHANGE OF ASSETS 1..............................................000 PRACTICE 11–17 RECORDING AMORTIZATION EXPENSE Amortization Expense.......................................... Old Asset.................................. Land....................000/4 years = \$62................... Accumulated Amortization........ 270......................... the building is impaired.000) \$600.. Accumulated Depreciation (old asset).....................................................000 – \$300....... 400.........................PRACTICE 11–15 1..000 Accumulated Depreciation.... 200..... RECORDING A TANGIBLE ASSET IMPAIRMENT The building is impaired......... Sum of future cash flows (\$20....... 450....000 – \$200..........................................................000 – \$125.....................................000 Building.......000).................................................................................. EXCHANGE OF ASSETS New Asset.......................................................000 Building.... 125................................................500 annual amortization expense (Note: Straight-line amortization is used unless there is compelling evidence for using another method............. 62........ 700.....................................................000).............000 – \$360............................................................ 325..000 Because the sum of future cash inflows is less than the book value of the asset....000 625.......................................000 – \$500.. 340..........................................000 Loss on Impairment (\$625... 40......000).............. The relevant comparison is the book value of the building to the sum of the expected future cash flows................................................ 230........................... 160............... 700................ 2..........

.............000 1..................000 249........765..... Old Asset.... New Asset..............000 \$ 3.. Land improvements—roads.. 3...000 tons = \$2..000 3.......750 \$ 9.000 ...................429.........................936 × 0.429................................................ 2010 depletion expense: Cost of natural resources less residual value.......000 Accretion expense: \$1...............33)..........395 11–33..........................................000 + \$1..................................................000....200...6 Chapter 11 PRACTICE 11–21 2..... Old Asset............ Accumulated Depreciation (old asset)....250 4.....000 estimated at year-end + 265...... Depreciation (or depletion) expense: \$2...................... Depletion expense—2010 (75................ (Concluded) Cash.............975..........................................000......................................... 80 70 850 250 1.......229...975....000 \$9........500. Remaining tons of ore as of beginning of 2011.................... 2..33 \$ 249......................429...08 = \$114.....................000.... Total cost to be depleted..... (4............... Remaining cost to deplete at beginning of 2011..000 \$ 9...............000/3......000........ 300 100 850 Cash......975...000 × \$3............ Accumulated Depreciation (old asset).936/1....000............. 2011 depletion expense: 2010 cost from above..........................000 975.........000 Market value of old asset = \$400 Implied gain on exchange of old asset = \$400 – \$150 book value = \$250 implied gain Market value of new asset = \$320 (\$400 less \$80 in cash) Asset value \$320 less implied gain of \$250 = \$70 11–32.....................................725.....................230 per ton 1...750 \$9.......229............................................936 = \$800..... The present value of the asset retirement obligation is computed as follows: FV = \$4... Depletion cost per ton—\$9...................936 The total cost of the uranium mine is \$2... Gain on Exchange (\$400 – \$150 book value)....... I = 8%.........936 Depletion per ton of ore: \$2.......... Less: 2010 depletion expense from above...230 per ton × 100 tons = \$223....................................................... Estimated tons of ore............... N = 14 years → \$1....... New Asset........................................................

...............000...000 × 15 years) undiscounted sum of future cash flows to determine whether the building is impaired... Accumulated depreciation (\$39...000 depreciation for first 5 years Remaining amount to be depreciated: \$500.... 11–34.000 (\$50... Loss on Impairment of Building.....000 = \$375.. The existence of an impairment loss is determined solely using the undiscounted sum of estimated future cash flows..000 530.000/10 = \$37. The impairment loss is equal to the \$530....000 × 10 years).........000 – \$380...extracted during the year) Depletion cost per ton—\$9.....04 \$ 540..725. The answer to (1) is unaffected by the fair value of the asset.000 920. ....000 3.000 \$ 910..000 The book value of \$910..600 Depreciation for the first 5 years: \$500........000 390......... The sum of future cash flows is less...000 – \$380..........000) difference between the book value of the building and its fair value..000/20 = \$25......04)...........000 per year \$25.....300...000 Annual rate for remaining 10 years: \$375....000 – \$125............000 – \$130...000 is compared to the \$750... Annual depreciation for the building has been \$39.000)/30 years]................ 2...... The impairment loss would be recorded as follows: Accumulated Depreciation—Building. Book value. The current book value of the building is computed as follows: Original cost......300.... 1. Depletion expense—2011 (265.500........300. 390...000 × 5 = \$125.. Building (\$1....500 Depreciation expense in 2011 is \$37.........000 (\$910..... \$1........000 [(\$1. so an impairment loss should be recognized. 11–37.............765............ not the fair value of the asset......000)..000 × \$2.. \$ 2......250/4.........

..... Because the exchange involves cash that is considered a “large” amount........ 390.....000 Because the fair value of \$1.. Accumulated depreciation (\$39... and the asset is recorded at the market value of the old machine plus the cash paid..300.......... (a) The truck should be valued at \$40... (c) The new machine should be valued at \$55....000 × 10 years)...000 – \$380.................250............ Revaluation Equity Reserve....... Della Bee will recognize \$340.8 11–38...... if determinable..........000 According to IAS 36... Because this exchange was for similar productive assets with a company in the same line of business with no cash involved......... the existence of impairment is determined by comparing the book value of \$910... \$1.000 is not used because it does not represent market value..000 390........ it is a monetary transaction.. Book value..............000 – \$1..000 11–44. Loss on Impairment of Building.... In this case.000 340..000..300.....000.000) as an upward asset revaluation. The impairment loss would be recorded as follows: Accumulated Depreciation—Building.......000 – \$910..... the book value of the old machine..... the determination of whether an impairment loss exists is based on a comparison of book value and fair value....000)/30 years].....000 because in a nonmonetary exchange not involving similar assets.... the test is based on a comparison of book value and the undiscounted sum of future cash flows....000..000 − \$380...000 – \$130. the new asset should be recorded at the fair market value of the asset surrendered... The current book value of the building is computed as follows: Original cost............... so an impairment loss should be recognized...000 920... under U. The list price of \$62. the indicated gain would be deferred.000 \$ 910...000 would be recognized by Coaltown.....000) difference between the book value of the building and its fair value..000 50.....300. List price is not necessarily the same as market value.....S... Building (\$1..... GAAP... The impairment loss is equal to the \$530......... 2. Chapter 11 1........000). A gain of \$5..000 [(\$1.000 to the fair value of \$380.000 + \$15....000 530................000 (\$910.. This treatment is consistent with the FASB’s assertion that the exchange has no commercial substance. The fair value is lower........... Annual depreciation for the building has been \$39. (b) The new machine should be valued at \$35..... The upward revaluation is recorded as follows: Accumulated Depreciation—Building.250. 390.300......000 (\$40...000)......... . Building (\$1.000 is greater than the book value of \$910......000).......250...... 3.000 (\$1..

38.................... . 11–44.....000................. 52. Newton Inc..000)............................000....000 Accumulated Depreciation—Machinery............. 17....................... The asset is thus recorded at the book value of the old machine plus the cash paid........000 with accumulated depreciation of \$17....................000 Accumulated Depreciation—Machinery...........(d) The new machine should be valued at \$38......000 Machinery (old)......000 Machinery (old)...000 (\$35................. Machinery (new)... the carrying value of the old machinery plus cash paid.. there is no culmination of the earnings process......... 55...000 Cash......................................000 Cash.000 + \$3............. 10.................000 for new machinery recorded at \$38............... (Concluded) Coaltown Corporation Machinery (new)......................000 To record exchange of old machinery costing \$52..........................................................................000 with accumulated depreciation of \$42................................000 To record exchange of old machinery costing \$55..................... Because the exchange is made with a company in the same line of business and involves similar assets and cash is considered a “small” amount...000 for new machinery recorded at \$10............................... 42........ 3................... 3........... the market value of the new machinery less the amount of the deferred gain.......