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.......