Intermediate accounting 17e by kieso ch11

Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield

Chapter 11
Depreciation, Impairments,
and
Depletion
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Learning Objectives
After studying this chapter, you should be able to:
1. Understand depreciation concepts and methods of
depreciation.
2. Discuss special depreciation methods and other
depreciation issues.
3. Identify the accounting issues related to asset impairment.
4. Explain the accounting procedures for depletion of natural
resources.
5. Demonstrate how to report and analyze property, plant,
equipment, and natural resources.
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Preview of Chapter 11
Depreciation, Impairments, and Depletion
Depreciation

• Factors involved
• Methods of depreciation

Special Methods and Other Issues
• Special depreciation methods
• Other depreciation issues
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Preview of Chapter 11
Impairments

• Recognizing impairments
• Measuring impairments
• Restoration of loss
• Assets to be disposed of

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Preview of Chapter 11
Depletion

• Establishing a base
• Write-off of resource cost
• Estimating reserves

• Liquidating dividends
• Continuing controversy

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Preview of Chapter 11
Presentation and Analysis
• Presentation
• Analysis

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Learning Objective 1
Describe Depreciation Concepts and
Methods of Depreciation

LO 1

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Depreciation—A Method of Cost

Allocation

Depreciation is the accounting process of allocating the
cost of tangible assets to expense in a systematic and
rational manner to those periods expected to benefit
from the use of the asset.
Allocating costs of long-lived assets:
• Fixed assets = Depreciation expense
• Intangibles = Amortization expense
• Natural resources = Depletion expense
LO 1

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Factors Involved in the Depreciation
Process

Three basic questions:

1) What depreciable base is to be used?
2) What is the asset’s useful life?
3) What method of cost apportionment is best for this
asset?

LO 1

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Factors Involved in Depreciation
Depreciable Base for the Asset
Original cost
Less: Salvage value
Depreciation base

LO 1

$10,000
1,000
$ 9,000

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Factors Involved in Depreciation
Estimation of Service Lives

• Service life often differs from physical life
• Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of
physical life).
2. Economic factors (inadequacy, supersession,
and obsolescence).

LO 1

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Methods of Depreciation
The profession requires the method employed be “systematic
and rational.” Methods used include:
1. Activity method (units of use or production).
2. Straight-line method.
3. Decreasing-charge methods (accelerated)
a. Sum-of-the-years’-digits.
b. Declining-balance method.
4. Special depreciation methods:
a. Group and composite methods.
b. Hybrid or combination methods.
LO 1

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Activity Method
Stanley Coal
Mines Facts

Cost of crane
Estimated useful life
Estimated salvage value

$500,000
5 years
$ 50,000

Productive life in hours

30,000 hours

Illustration: If Stanley uses the crane for 4,000 hours the first year,
the depreciation charge is:

LO 1

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Straight-Line Method
Stanley Coal
Mines Facts

Cost of crane
Estimated useful life
Estimated salvage value

$500,000
5 years
$ 50,000

Productive life in hours

30,000 hours

Illustration: Stanley computes depreciation as follows:

LO 1

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Decreasing-Charge Methods
Stanley Coal
Mines Facts

Cost of crane
Estimated useful life
Estimated salvage value

$500,000
5 years
$ 50,000

Productive life in hours

30,000 hours

Sum-of-the-Years’-Digits. Each fraction uses the sum of the years as
a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator is the
number of years of estimated life remaining as of the beginning of
the year.
Alternate sum-of-theyears’ calculation
LO 1

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Sum-of-the-Years’-Digits
Depreciation Schedule
Depreciation
Year
Base

a

Remaining
Life in Years

Depreciation
Fraction

Depreciation Book Value,

Expense
End of Year

1

$450,000

5

5/15

$150,000

$350,000

2

450,000

4

4/15

120,000

230,000

3

450,000

3

3/15

90,000

140,000

4

450,000

2

2/15

60,000

80,000

5

450,000

1

1/15

30,000

50,000a

15

15/15

$450,000

Salvage value.

LO 1

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Decreasing-Charge Methods
Declining-Balance Method
Stanley Coal
Mines Facts

Cost of crane
Estimated useful life
Estimated salvage value

$500,000
5 years
$ 50,000

Productive life in hours

30,000 hours

• Utilizes a depreciation rate (percentage) that is some multiple of
the straight-line method.
• Does not deduct the salvage value in computing the depreciation
base.
LO 1

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Declining-Balance Method
Depreciation Schedule
Book Value
of Asset
Year First of Year
1
$500,000

Rate on
Declining
Balancea
40%

Depreciation

Expense
$200,000

Balance
Accumulated
Depreciation
$200,000

Book Value,
End of Year
$300,000

2

300,000

40%

120,000

320,000

180,000

3

180,000

40%

72,000

392,000

108,000

4

108,000

40%

43,000

435,200

64,800

5

64,800

40%

14,800b

450,000

50,000

a

Based on twice the straight-line rate of 20% ($90,000/$450,000 = 20%; 20% × 2 = 40%).

b

Limited to $14,800 because book value should not be less than salvage value.

LO 1

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Methods of Depreciation
Illustration—(Four Methods): Maserati Corporation purchased a new
machine for its assembly process on August 1, 2017. The cost of this
machine was $150,000. The company estimated that the machine
would have a salvage value of $24,000 at the end of its service life. Its
life is estimated at 5 years and its working hours are estimated at
21,000 hours. Year-end is December 31.
Instructions: Compute the depreciation expense under the following
methods.
(a) Straight-line depreciation.
(b) Activity method
(c) Sum-of-the-years’-digits.
(d) Double-declining balance.
LO 1

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Straight-Line Method
Depreciation Schedule
Year
2017
2018
2019
2020
2021
2022

Depreciable
Base
$126,000
126,000
126,000
126,000
126,000
126,000

/
/
/
/
/
/

Years
5
5
5
5
5
5

=
=
=
=
=
=

Annual
Expense
$25,200
25,200
25,200
25,200
25,200
25,200

×
×
×
×
×

×

Partial
Year
5/12
 
 
 
 
7/12

=
=
=
=
=
=

Current
Year
Accum.
Expense
Deprec.
$ 10,500 $ 10,500
25,200
35,700
25,200
60,900
25,200
86,100

25,200 111,300
14,700 126,000
$126,000

Journal entry:
2017

LO 1

Depreciation Expense
Accumultated Depreciation
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10,500
10,500
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Activity Method
Depreciation Schedule
Year
2017
2018
2019
2020
2021

(Given)
Rate per
Hours

Hours
800
×
$6
×
×
 
×
 
×
800

=
=
=
=
=

(Assume 800 hours used in 2017)
($126,000/21,000 hours = $6 per hour)
Annual
Expense
$4,800

Partial
Year

Current
Year
Expense

$4,800

Accum.
Deprec.
$4,800

 
 
$4,800

Journal entry:
2017

LO 1

Depreciation Expense
Accumultated Depreciation
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4,800
4,800
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Sum-of-the-Years’-Digits Method
Depreciation Schedule (7/12 = .58333)
Year
2017
2018
2019

2020
2021
2022

Depreciable
Base
$126,000
126,000
126,000
126,000
126,000
126,000

×
×
×
×
×
×

Years
5/15
4.583/15
3.583/15
2.583/15
1.583/15
.583/15

=
=

=
=

=

=

Annual
Expense
$42,000
38,500
30,100
21,700
13,300
4,900

×
×
×
×
×
×

Partial
Year
5/12
 
 
 
 

=
=
=
=
=
=

Current
Year
Accum.
Expense Deprec.
$ 17,500 $ 17,500
38,500
56,000
30,100
86,100
21,700 107,800
13,300 121,100
4,900
126,000
$126,000

Journal entry:
2017

LO 1

Depreciation Expense
Accumultated Depreciation

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17,500
17,500
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Double-Declining Balance Method
Depreciation Schedule
Year
2017
2018
2019
2020
2021

Depreciable
Base
$150,000
125,000
75,000
45,000
27,000

Rate Per
Year
× 40%
× 40%
× 40%
× 40%

× 40%

=
=
=
=
=

Annual
Expense
$60,000
50,000
30,000
18,000
10,800

×
×
×
×
×

Partial
Year
5/15
 
 
 
Plug

Current Year
Expense
= $ 25,000
=
50,000
=
30,000
=
18,000
=
3,000
$126,000

Accum.
Deprec.
$ 17,500
56,000
86,100
107,800
121,100
$126,000

Journal entry:
2017

LO 1

Depreciation Expense
Accumultated Depreciation
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25,000
25,000
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Learning Objective 2
Discuss Special Depreciation Methods
and Other Depreciation Issues

LO 2

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Special Depreciation Methods and
Other Issues

Special Depreciation Methods

Two methods of depreciating multiple-asset accounts exist:
• Group method used when the assets are similar in nature and
have approximately the same useful lives.
• Composite method used when the assets are dissimilar and
have different lives.
Choice of method depends on the nature of the assets involved.
The computation for group or composite methods is essentially the
same: find an average and depreciate on that basis.

LO 2

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