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Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 1 of 12 Ehab Abdou 97672930
Section 1:Depreciation
Classification of the assets section in the statement of financial position. The assets section of the statement of financial position contains the following:
Assets Non Current assets
1- Long term investments 2- Tangible assets (Property plant and equipment)
Plant Assets [ Depreciation ] Natural resources [ Depletion ]
3- Intangible assets [ Amortization ] Patent Copyright Franchise
Exercise 1: Amber corporation buys a truck on January 1, 2011 . information relating to the truck is as follows: * Cost $50,000 * Estimated service life 5 years ( or 100,000 miles ) * Salvage Value $ 5,000 * Actual Miles driven: 22,000 miles (in 2011 ) ; 35,000 miles ( in 2012 ) ; 13,000 miles ( in 2013 ) 15,000 miles (in 2014 ) ; 10,000 miles ( in 2015 ) Instructions: Prepare a depreciation schedule using: 1. Activity method (units of use or production). 2. Straight-line method. 3. Diminishing (accelerated)-charge methods:
Sum-of-the-years’-digits. Declining-balance method.
Solution: 1. Activity method (units of use or production).
Years Actual Units
of Use Depreciation Cost per unit
Depreciation Expenses
Accumulated depreciation
Book Value
2011 22,000 0.45 9,900 9,900 40,100
2012 35,000 0.45 15,750 25,650 24,350
2013 13,000 0.45 5,850 31,500 18,500
2014 15,000 0.45 6,750 38,250 11,750
2015 10,000 0.45 4,500 45,000 5,000
Solution formulas: 1. Actual Units of activity = used units during the year ( Given ) 2. Depreciation cost per unit = ( Cost – Salvage Value ) ÷ Total Estimated Activity .
= ( $50,000 - $5,000 ) ÷ 100,000 Miles = $0.45 3. Depreciation Expenses = Actual units of Use * Depreciation cost per unit 4. Accumulated Depreciation = Last year Acc/ Dep. + Current year Depreciation Exp. 5. Book Value = Cost – Accumulated Depreciation
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 2 of 12 Ehab Abdou 97672930
2. Straight-line method.
Years Depreciable
cost Depreciation
Rate Depreciation
Expenses Accumulated depreciation
Book Value
2011 45,000 20% 9,000 9,000 41,000
2012 45,000 20% 9,000 18,000 32,000
2013 45,000 20% 9,000 27,000 23,000
2014 45,000 20% 9,000 36,000 14,000
2015 45,000 20% 9,000 45,000 5,000
Solution formulas: 1. Depreciable cost = Cost – Salvage Value = ( 50,000 – 5,000) 2. Depreciation Rate = 1/ UL * 100 = % = (1 ÷ 5 ) × 100 = 20% 3. Depreciation Expenses = Depreciable Cost * Depreciation Rate
= ( Cost – Residual Value ) / U L 4. Accumulated Depreciation = Last year Acc/ Dep. + Current year Depreciation Exp.
= (Depreciation Expense * Years ) For SLM only 3. Diminishing (accelerated)-charge methods:
Sum-of-the-years’-digits.
Years Depreciable
base Fraction
Depreciation Expenses
Accumulated depreciation
Book Value
2011 45,000 5 / 15 15,000 15,000 35,000
2012 45,000 4 / 15 12,000 27,000 23,000
2013 45,000 3 / 15 9,000 36,000 14,000
2014 45,000 2 / 15 6,000 42,000 8,000
2015 45,000 1 / 15 3,000 45,000 5,000
Solution formulas: 1- Depreciable Base = cost – salvage value Number of year ( at beginning of year ) N * ( N + 1 ) 2- Fraction = ------------------------------------------------- S = ----------------------- Sum of years ( S ) 2 3- Depreciation expense = Depreciable cost * Fraction Declining-balance method.
Year Book value at
beginning Rate
Depreciation Expenses
Accumulated depreciation
Book Value
2011 50,000 40% 20,000 20,000 30,000
2012 30,000 40% 12,000 32,000 18,000
2013 18,000 40% 7,200 39,200 10,800
2014 10,800 40% 4,320 43,570 6,480
2015 6,480 40% 1,480 45,000 5,000
Solution formulas: 1- Book value at beginning = Cost – Acc/ Dep. = Cost at first year because Acc/ Dep. = Zero at beginning = Book value at the end of last year for the following years 2- (1 ÷ Useful life) * 100 * 2 = % 3- depreciation expenses = Book value at beginning * depreciation rate 4- Accumulated Depreciation = Last Acc/Dep. + Depreciation Exp 5- Book Value = Cost – Accumulated Depreciation
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 3 of 12 Ehab Abdou 97672930
Special Cases:
(1) How should companies compute depreciation for partial periods? Exercise 2: Amber corporation buys a truck on April 1, 2011 . information relating to the truck is as follows:
* Cost $50,000 * Estimated service life 5 years ( or 100,000 miles ) * Salvage Value $ 5,000 * Actual Miles driven: 22,000 miles (in 2011 ) ; 35,000 miles ( in 2012 ) ; 13,000 miles ( in 2013 ) 15,000 miles (in 2014 ) ; 10,000 miles ( in 2015 )
Instructions: Compute the depreciation expense under the following methods. (a) Activity method. (b) Straight-line depreciation. (c) Sum-of-the-years’-digits. (d) Double-declining balance.
Solution:
Activity Method
Years Actual Units
of Use Depreciation Cost per unit
Depreciation Expenses
Accumulated depreciation
Book Value
2011 22,000 0.45 9,900 9,900 40,100
2012 35,000 0.45 15,750 25,650 24,350
2013 13,000 0.45 5,850 31,500 18,500
2014 15,000 0.45 6,750 38,250 11,750
2015 10,000 0.45 4,500 45,000 5,000
Straight Line Method
Years Depreciable
cost Depreciation
Rate Partial Year
Depreciation Expenses
Accumulated depreciation Book Value
2011 45,000 20% 9/12 6,750 6,750 43,250
2012 45,000 20% 9,000 15,750 34,250
2013 45,000 20% 9,000 24,750 25,250
2014 45,000 20% 9,000 33,750 16,250
2015 45,000 20% 9,000 42,750 7,250
2016 45,000 120% 3/12 2,250 45,000 5,000
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 4 of 12 Ehab Abdou 97672930
Sum of years digits
3/12 = 0.25
Years Depreciable
base Fraction Partial Year
Depreciation Expenses
Accumulated depreciation Book Value
2011 45,000 5/15 9/12 11,250 11,250 38,750
2012 45,000 4.25/15 12,750 24,000 26,000
2013 45,000 3.25/15 9,750 33,750 16,250
2014 45,000 2.25/15 6,750 40,500 9,500
2015 45,000 1.25/15 3,750 44,250 5,750
2016 45,000 0.25/15 750 45,000 5,000
Double-declining balance.
Year
Book value at
beginning Rate Partial Year
Depreciation Expenses
Accumulated depreciation Book Value
2000 50,000 40% 9/12 15,000 15,000 35,000
2001 35,000 40% 14,000 29,000 21,000
2002 21,000 40% 8,400 37,400 12,600
2003 12,600 40% 5,040 42,440 7,560
2004 7,560 40% 2,560 45,000 5,000
(2) Group Depreciation.
Exercise 3:
EuroAsia Airlines purchases an airplane for €100,000,000 on January 1, 2011. The airplane has a useful life of 20 years and a residual value of €0. EuroAsia uses the straight-line method of depreciation for all its airplanes. EuroAsia identifies the following components, amounts, and useful lives.
Instructions:
Compute the depreciation expense for EuroAsia airplane for 2011. Solution:
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 5 of 12 Ehab Abdou 97672930
Journal Entry:
Date Accounts Dr. Cr.
Dec 31, 2011 Depreciation expenses 8,600,000 Accumulated depreciation 8,600,000
(3) Revising Depreciation? Handled prospectively and not retrospectively Exercise 4: On Jan 1, 2011 Equipment was purchased at a cost of $46,000 with salvage value of $6,000 and 8 years useful life, during 2013 the company revises its estimate of service live from 8 years to 12 years and salvage value to $3,000. The company has a policy of using the straight-line method to depreciate equipment. and Instruction: 1. Prepare any required journal entry to correct the prior years’ depreciation? 2. Calculate the depreciation expense for 2014.
Purchase Date Jan 1, 2011 Revising Date 2013
Cost $46,000 Book Value ?
Service live 8 years New Service Live 12 years
Salvage value $6,000 New Salvage Value $3,000
Method SLM Method SLM
Solution:
1. No entry required to correct the prior year's depreciation.
2. Depreciation expenses for 2012. Book Value of the assets at beginning of 2013 [End of 2012] :
a. Depreciation expenses =
=
= $5,000
b. Accumulated depreciation = Depreciation expenses × years = $5,000 × 2 = $10,000 c. Book Value = Cost – Accumulated depreciation = $46,000 - $10,000 = $36,000 Revised Depreciation for 2013 and following years :
Revised Depreciation =
Revised Depreciation =
= $3,300
Journal Entry:
Date Accounts Dr. Cr.
Dec 31, 2011 Depreciation expenses 3,300 Accumulated depreciation 3,300
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 6 of 12 Ehab Abdou 97672930
Section 2:Impairment النقص الحاد في قيمة األصل
1- Book Value ( Carrying Value ) = Cost – Accumulated Depreciation 2- Recoverable Amount = The Higher of
a. Value of Sell = Selling Price – Cost to Sell b. Value in Use = Present Value of Future Cash Flow (Revenue + Residual Value)
= [(Rev × PVF-OA) + (R.V × PVF) Exercise 5: At the end of 2010, Verma Company tests a machine for impairment. The machine has a carrying amount of $200,000. It has an estimated remaining useful life of five years. Because there is little market-related information on which to base a recoverable amount based on fair value, Verma determines the machine’s recoverable amount should be based on value-in-use. Verma uses a discount rate of 8 percent. Verma’s analysis indicates that its future cash flows will be $40,000 each year for five years, and it will receive a residual value of $10,000 at the end of the five years. It is assumed that all cash flows occur at the end of the year.
Solution: 1. Determining the recoverable amount based in Fair Value.
2. Conducting an Impairment Test.
القيمة االسترداديةالقيمة التي يمكن الحصول عليها
خالل األصل من سواء من
بـيــــــع األصل -1 استخدام األصل -2
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 7 of 12 Ehab Abdou 97672930
3. Recording Impairment Loss.
Date Accounts Dr. Cr.
Dec 31, 2010 Loss on Impairment 166,514 Accumulated depreciation 166,514
Reversal of Impairments Loss. Exercise 6: Presented below is information related to equipment owned by Marley Company at December 31, 2010.
Cost € 7,000,000 Accumulated depreciation to date 1,500,000 Value-in-use 5,000,000 Fair value less cost of disposal 4,400,000 Assume that Marley will continue to use this asset in the future. As of December 31, 2010, the equipment has a remaining useful of 4 years. Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010. (b) Prepare the journal entry to record depreciation expense for 2011. (c) The recoverable amount of the equipment at December 31, 2011, is €5,250,000. Prepare the
journal entry (if any) necessary to record this increase. Solution
(a) December 31, 2010 Loss on impairment.......................................... 500,000 Accumulated Depreciation––Equipment..... 500,000
Value in use 5,000,000
Fair value less cost of disposal 4,400,000
(=) Recoverable Amount (Higher Value) 5,000,000
Cost 7,000,000
(-) Accumulated depreciation 1,500,000
(=) Book Value 5,500,000
Loss on impairment - 500,000
(b) December 31, 2011 Depreciation Expense.......................................... 1,250,000 Accumulated Depreciation––Equipment........ 1,250,000 New carrying amount.................. €5,000,000 Useful life.................................... ÷ 4 years Depreciation per year................. €1,250,000 (c) Accumulated Depreciation––Equipment.............. 1,500,000 Recovery of Impairment Loss ......................... 1500,000
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 8 of 12 Ehab Abdou 97672930
Revaluations Companies may value long-lived tangible asset after acquisition at cost or fair value. Revaluation—Land Illustration: Siemens Group (DEU) purchased land for €1,000,000 on January 5, 2010. The company elects to use revaluation accounting for the land in subsequent periods. At December 31, 2010, the land’s fair value is €1,200,000. The entry to record the land at fair value is as follows.
Land 200,000 Unrealized Gain on Revaluation - Land 200,000
Note: Unrealized Gain on Revaluation—Land increases other comprehensive income in the statement of comprehensive income. Revaluation—Depreciable Assets Illustration: Lenovo Group (CHN) purchases equipment for ¥500,000 on January 2, 2010. The equipment has a useful life of five years, is depreciated using the straight-line method of depreciation, and its residual value is zero. Lenovo chooses to revalue its equipment to fair value over the life of the equipment. Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5) at December 31, 2010, as follows.
Depreciation Expense 100,000 Accumulated Depreciation—Equipment 100,000
After this entry, Lenovo’s equipment has a carrying amount of ¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent appraisal for the fair value of equipment at December 31, 2010, which is ¥460,000.
Accumulated Depreciation—Equipment 100,000 Equipment 40,000 Unrealized Gain on Revaluation—Equipment 60,000
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 9 of 12 Ehab Abdou 97672930
Section 3: Depletion Normally, companies compute depletion for natural recourses like (Mineral recourses, timberlands) Using a units-of-production method (activity approach).
Note: The cost of Natural recourses is composed of:
(1) Pre-exploratory costs. (2) Exploratory and evaluation costs. (3) Development costs.
Illustration: MaClede Co. acquired the right to use 1,000 acres of land in South Africa to mine for silver. The lease cost is $50,000, and the related exploration costs on the property are $100,000. Intangible development costs incurred in opening the mine are $850,000. MaClede estimates that the mine will provide approximately 100,000 ounces of silver, MaClede extracts 25,000 ounces in the first year. Instructions: Prepare the journal entry to record the depletion expenses for the first year. Solution:
Inventory 250,000 Accumulated Depletion 250,000
M ’ f f
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 10 of 12 Ehab Abdou 97672930
Ch 12 : Intangible Assets Issues
► Characteristics of Intangible assets: Three Main Characteristics: (1) Identifiable, (Can be sold) (2) Lack physical existence. (3) Not monetary assets. Normally classified as non-current asset.
► Valuation of Intangible assets: Purchased Intangibles:
Recorded at cost.
Includes all expenditures necessary to make the intangible asset ready for its intended use.
Typical costs include: Purchase price. Legal fees. Other incidental expenses. مصروفات عرضية
Internally Created Intangibles:
Companies expense all research phase costs and some development phase costs.
Certain development costs are capitalized once economic viability criteria are met.
IFRS identifies several specific criteria that must be met before development costs are capitalized. Beginning of The Project
Ready for Sale or use
Research phase Development phase
Expenses Expenses Capitalize
Economic Viability
► Accounting Treatment for Intangibles
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 11 of 12 Ehab Abdou 97672930
Exercise: Harcott Co. incurs $180,000 in legal costs on January 1, 2011, to successfully defend a patent. The patent’s useful life is 20 years, amortized on a straight-line basis. Harcott records the legal fees and the amortization at the end of 2011 as follows.
Date Accounts Dr. Cr.
Jan 01, 2011 Patent 180,000 Cash 180,000
Dec 31, 2011 Patent Amortization Expenses 9,000 Patent 9,000
Goodwill
Conceptually, represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of ...
Cost of the purchase over the FMV of the identifiable net assets purchased.
Internally created goodwill should not be capitalized.
Exercise: Multi-Diversified, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Multi-Diversified is interested in buying São Paulo, Brazil. The illustration presents the statement of financial position of Tractorling Company.
Multi-Diversified investigates Tractorling’s underlying assets to determine their fair values.
Tractorling Company decides to accept Multi-Diversified’s offer of $400,000. What is the value of the goodwill, if any?
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION
Intermediate Accounting 2:IFRS Page 12 of 12 Ehab Abdou 97672930
Solution: Multi-Diversified records this transaction as follows.
Date Accounts Dr. Cr.
Jan 01, 2011 Property, Plant, and Equipment 205,000 Patents 18,000 Inventories 122,000 Receivables 35,000 Cash 25,000 Goodwill 50,000 Liabilities 55,000 Cash 400,000
Goodwill Write-off Goodwill considered to have an indefinite life. Should not be amortized. Only adjust carrying value when goodwill is impaired. Describe the accounting procedures for recording goodwill.