Kế toán tài chính - Chương 11: Depreciation, impairments, and depletion

C H A P T E R 11DEPRECIATION, IMPAIRMENTS, AND DEPLETIONIntermediate Accounting13th EditionKieso, Weygandt, and Warfield Explain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and decreasing-charge methods of depreciation.Explain special depreciation methods.Explain the accounting issues related to asset impairment.Explain the accounting procedures for depletion of natural resources.Explain how to report and analyze property, plant, equipment, and natural resources.Learning ObjectivesDepreciationFactors involvedMethods of depreciationSpecial methodsSpecial issuesImpairmentsDepletionPresentation and AnalysisRecognizing impairmentsMeasuring ImpairmentsRestoration of lossAssets to be disposed ofPresentationAnalysisEstablishing a baseWrite-off of resource costEstimating reservesLiquidating dividendsContinuing controversyDepreciation, Impairments, and DepletionAllocating costs of long-term assets:Fixed assets = Depreciation expenseIntangibles = Amortization expenseNatural resources = Depletion expenseDepreciation 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.Depreciation - Method of Cost AllocationLO 1 Explain the concept of depreciation.Depreciation - Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.Three basic questions:Factors Involved in the Depreciation ProcessWhat depreciable base is to be used?What is the asset’s useful life?What method of cost allocation is best?Depreciation - Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.Depreciable BaseFactors Involved in the Depreciation ProcessIllustration 11-1Depreciation - Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.Estimation of Service LifesFactors Involved in the Depreciation ProcessService life of an asset often differs from its physical life.Companies retire assets for two reasons: physical factors (such as casualty or expiration of physical life) and economic factors (obsolescence).Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.The profession requires the method employed be “systematic and rational.” Examples include:Methods of DepreciationActivity method (units of use or production).Straight-line method. Sum-of-the-years’-digits.Declining-balance method.Group and composite methods.Hybrid or combination methods.Accelerated methodsSpecial methodsDepreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Activity MethodIllustration 11-2Illustration: If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is:Stanley Coal Mines FactsIllustration 11-3Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Straight-Line MethodIllustration 11-2Illustration: Stanley computes depreciation as follows:Stanley Coal Mines FactsIllustration 11-4Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Decreasing-Charge MethodsIllustration 11-2Stanley Coal Mines FactsSum-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.Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Sum-of-the-Years’-DigitsIllustration 11-6Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Decreasing-Charge MethodsIllustration 11-2Stanley Coal Mines FactsDeclining-Balance Method. 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.Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Declining-Balance MethodIllustration 11-7Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.E11-5 (Depreciation Computations—Four Methods): KC Corporation purchased a new machine for its assembly process on August 1, 2010. 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 estimatedat 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. (c) Sum-of-the-years’-digits.(b) Activity method (d) Double-declining balance.Depreciation - Method of Cost AllocationLO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.Straight-line MethodDepreciation - Method of Cost AllocationLO 3Activity Method(Assume 800 hours used in 2010)Depreciation - Method of Cost AllocationSum-of-the-Years’-Digits MethodLO 35/12 = .4166677/12 = .583333Depreciation - Method of Cost AllocationDouble-Declining Balance MethodLO 3Depreciation - Method of Cost AllocationLO 4 Explain special depreciation methods.The choice of method depends on the nature of the assets involved:Special Depreciation MethodsGroup method used when the assets are similar in nature and have approximately the same useful lives.Composite approach used when the assets are dissimilar and have different lives.Companies are also free to develop tailor-made depreciation methods, provided the method results in the allocation of an asset’s cost in a systematic and rational manner (Hybrid or Combination Methods).Depreciation - Method of Cost AllocationLO 4 Explain special depreciation methods.Special Depreciation IssuesHow should companies compute depreciation for partial periods?Companies normally compute depreciation on the basis of the nearest full month.Does depreciation provide for the replacement of assets?Funds for the replacement of the assets come from the revenuesHow should companies handle revisions in depreciation rates?Changes in Depreciation RateAccounted for in the period of change and future periods (Change in Estimate)Not handled retrospectivelyNot considered errors or extraordinary itemsLO 4 Explain special depreciation methods.Depreciation - Method of Cost AllocationArcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2010 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Questions:What is the journal entry to correct the prior years’ depreciation?Calculate the depreciation expense for 2010.No Entry RequiredChange in Estimate ExampleLO 4 Explain special depreciation methods.Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2009)Change in Estimate ExampleAfter 7 yearsEquipment cost $510,000Salvage value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000x 7 years = $350,000 First, establish NBV at date of change in estimate.LO 4 Explain special depreciation methods.Change in Estimate ExampleAfter 7 yearsNet book value $160,000Salvage value (new) 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2010.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2010LO 4 Explain special depreciation methods.ImpairmentsLO 5 Explain the accounting issues related to asset impairment.When the carrying amount of an asset is not recoverable, a company records a write-off referred to as an impairment. Events leading to an impairment:Decrease in the market value of an asset. Change in the manner in which an asset is used.Adverse change in legal factors or in the business climate.An accumulation of costs in excess of the amount originally expected to acquire or construct an asset.A projection or forecast that demonstrates continuing losses associated with an asset.ImpairmentsLO 5 Explain the accounting issues related to asset impairment.Measuring ImpairmentsReview events for possible impairment.If the review indicates impairment, apply the recoverability test. If the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset, an impairment has occurred.3. Assuming an impairment, the impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value is the market value or the present value of expected future net cash flows.ImpairmentsLO 5 Explain the accounting issues related to asset impairment.Illustration 11-16Accounting for ImpairmentsE11-16 (Impairment): Presented below is information related to equipment owned by Pujols Company at December 31, 2010. Assume that Pujols will continue to use this asset in the future. As of December 31, 2010, the equipment has a remaining useful life 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 fair value of the equipment at December 31, 2011, is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.ImpairmentsLO 5 Explain the accounting issues related to asset impairment.Loss on impairment 3,600,000 Accumulated depreciation 3,600,000Impairments(a).12/31/10LO 5 Explain the accounting issues related to asset impairment.Depreciation expense 1,100,000 Accumulated depreciation 1,100,000Impairments(b).(c). Restoration of any impairment loss is not permitted.12/31/11LO 5 Explain the accounting issues related to asset impairment.Natural resources, often called wasting assets, include petroleum, minerals, and timber.They have two main features:DepletionLO 6 Explain the accounting procedures for depletion of natural resources.complete removal (consumption) of the asset, andreplacement of the asset only by an act of nature.Depletion is the process of allocating the cost of natural resources.Establishing a Depletion BaseDepletionLO 6 Explain the accounting procedures for depletion of natural resources.Computation of the depletion base involves four factors: Acquisition cost of the deposit, Exploration costs, Development costs, and Restoration costs.Write-off of Resource CostDepletionLO 6 Explain the accounting procedures for depletion of natural resources.Normally, companies compute depletion on a units-of-production method (an activity approach). Thus, depletion is a function of the number of units extracted during the period.Calculation:Total cost – Salvage valueTotal estimated units available= Depletion cost per unitUnits extracted x Cost per unit= DepletionE11-19 (Depletion Computations—Timber): Hernandez Timber Company owns 9,000 acres of timberland purchased in 1999 at a cost of $1,400 per acre. At the time of purchase the land without the timber was valued at $400 per acre. In 2000, Hernandez built fire lanes and roads, with a life of 30 years, at a cost of $87,000. Every year Hernandez sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2001, Hernandez selectively logged and sold 700,000 board feet of timber, of the estimated 3,000,000 board feet. In 2002, Hernandez planted new seedlings to replace the trees cut at a cost of $100,000.DepletionLO 6 Explain the accounting procedures for depletion of natural resources.Instructions:Determine the depreciation expense and the cost of timber sold related to depletion for 2001.E11-19 (Depletion Computations—Timber)DepletionLO 6 Explain the accounting procedures for depletion of natural resources.E11-19 (Depletion Computations—Timber)DepletionLO 6 Explain the accounting procedures for depletion of natural resources.Estimating Recoverable ReservesDepletionLO 6 Explain the accounting procedures for depletion of natural resources.Same as accounting for changes in estimates.Revise the depletion rate on a prospective basis.Divides the remaining cost by the new estimate of the recoverable reserves.Liquidating Dividends - Dividends greater than the amount of accumulated net income.DepletionLO 6 Explain the accounting procedures for depletion of natural resources.Illustration: Callahan Mining had a retained earnings balance of $1,650,000 and paid-in capital in excess of par of $5,435,493. Callahan’s board declared a dividend of $3 a share on the 1,000,000 shares outstanding. It records the $3,000,000 cash dividend as follows.Retained Earnings 1,650,000Paid-in Capital in Excess of Par 1,350,000 Cash 3,000,000Continuing ControversyOil and Gas Industry:Full cost conceptSuccessful efforts conceptDepletionLO 6 Explain the accounting procedures for depletion of natural resources.Presentation of Property, Plant, Equipment, and Natural ResourcesPresentation and AnalysisBasis of valuation (cost)Pledges, liens, and other commitmentsDepreciation expense for the period.Balances of major classes of depreciable assets.Accumulated depreciation.A description of the depreciation methods used.Depreciating assets, use Accumulated Depreciation.Depleting assets may include use of Accumulated Depletion account, or the direct reduction of asset.DisclosuresLO 7 Explain how to report and analyze property, plant, equipment, and natural resources.The assets turnover is a measure of a firm’s ability to generate sales from a particular investment in assets. Presentation and AnalysisLO 7 Explain how to report and analyze property, plant, equipment, and natural resources.Solution on notes pageIllustration 11-20Presentation and AnalysisLO 7 Explain how to report and analyze property, plant, equipment, and natural resources.The profit margin on sales is a measure of the ability to generate operating income from a particular level of sales.Solution on notes pageIllustration 11-21Presentation and AnalysisLO 7 Explain how to report and analyze property, plant, equipment, and natural resources.Rate of Return on Assets measures a firm’s success in using assets to generate earnings.Solution on notes pageIllustration 11-22The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:Net Income Average Total Assets Rate of Return on Assets = Net Income Net Sales Profit Margin on Sales = Net SalesAsset Turnover x x Average Total Assets Presentation and AnalysisLO 7 Explain how to report and analyze property, plant, equipment, and natural resources.$64.2 ($811.8 + 665.3) / 2Rate of Return on Assets = $64.2 $420.1 Profit Margin on Sales = $420.1Asset Turnover x x Presentation and Analysis8.7% 15.28% = x .569 ($811.8 + 665.3) / 2LO 7 Explain how to report and analyze property, plant, equipment, and natural resources.The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:Under both iGAAP and U.S. GAAP, interest costs incurred during construction must be capitalized.iGAAP, like U.S. GAAP, capitalizes all direct costs in self-constructed assets. The accounting for exchanges of nonmonetary assets has recently converged between iGAAP and U.S. GAAP. iGAAP permits the same depreciation methods (straight-line, accelerated, units-of-production) as U.S. GAAP.As discussed in the Chapter 4 Convergence Corner, iGAAP permits asset revaluations (which are not permitted in U.S. GAAP). Consequently, companies that use the revaluation framework must follow revaluation depreciation procedures. iGAAP also uses a fair value test to measure the impairment loss. However, iGAAP does not use the first-stage recoverability test used under U.S. GAAP—comparing the undiscounted cash flows to the carrying amount. Thus, the iGAAP test is more strict than U.S. GAAP.LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemMACRS differs from GAAP in three respects: a mandated tax life, which is generally shorter than the economic life; cost recovery on an accelerated basis; and an assigned salvage value of zero.LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemTax Lives (Recovery Periods)Illustration 11A-1LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemTax Depreciation MethodsIllustration 11A-2LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemIllustration: Computer and peripheral equipment purchased by Denise Rode Company on January 1, 2009.LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemIllustration:Illustration 11A-3LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemIllustration: Using the rates from the MACRS depreciation rate schedule for a 5-year class of property, Rode computes depreciation as followsIllustration 11A-4Illustration 11A-5LO 8 Describe income tax methods of depreciation.Modified Accelerated Cost Recovery SystemAdditional IssuesOptional straight-line methodTax versus book depreciationCopyright © 2009 John Wiley & Sons, Inc. 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