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1、Chapter 11-1Chapter 11-2C H A P T E R 11DEPRECIATION,IMPAIRMENTS,AND DEPLETIONIntermediate Accounting13th EditionKieso,Weygandt,and Warfield Chapter 11-31.1.Explain the concept of depreciation.Explain the concept of depreciation.2.2.Identify the factors involved in the depreciation process.Identify
2、the factors involved in the depreciation process.3.3.Compare activity,straight-line,and decreasing-charge methods of Compare activity,straight-line,and decreasing-charge methods of depreciation.depreciation.4.4.Explain special depreciation methods.Explain special depreciation methods.5.5.Explain the
3、 accounting issues related to asset impairment.Explain the accounting issues related to asset impairment.6.6.Explain the accounting procedures for depletion of natural resources.Explain the accounting procedures for depletion of natural resources.7.7.Explain how to report and analyze property,plant,
4、equipment,and natural Explain how to report and analyze property,plant,equipment,and natural resources.resources.Learning ObjectivesChapter 11-4DepreciationDepreciationFactors involvedFactors involvedMethods of Methods of depreciationdepreciationSpecial methodsSpecial methodsSpecial issuesSpecial is
5、suesImpairmentsImpairmentsDepletionDepletionPresentation and Presentation and AnalysisAnalysisRecognizing Recognizing impairmentsimpairmentsMeasuring Measuring ImpairmentsImpairmentsRestoration of Restoration of losslossAssets to be Assets to be disposed ofdisposed ofPresentationPresentationAnalysis
6、AnalysisEstablishing a baseEstablishing a baseWrite-off of Write-off of resource costresource costEstimating Estimating reservesreservesLiquidating Liquidating dividendsdividendsContinuing controversyContinuing controversyDepreciation,Impairments,and DepletionChapter 11-5Allocating costs of long-ter
7、m 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.
8、Depreciation-Method of Cost AllocationLO 1 Explain the concept of depreciation.LO 1 Explain the concept of depreciation.Chapter 11-6Depreciation-Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.LO 2 Identify the factors involved in the depreciation process.Thre
9、e basic questions:Factors Involved in the Depreciation Process(1)What depreciable base is to be used?(2)What is the assets useful life?(3)What method of cost allocation is best?Chapter 11-7Depreciation-Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.LO 2 Ident
10、ify the factors involved in the depreciation process.Depreciable BaseFactors Involved in the Depreciation ProcessIllustration 11-1Illustration 11-1Chapter 11-8Depreciation-Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.LO 2 Identify the factors involved in th
11、e 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).Chap
12、ter 11-9Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-charge methods of LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.depreciation.The profession requires the method employed be“systematic and rational.”Examples include:M
13、ethods of Depreciation(1)Activity method(units of use or production).(2)Straight-line method.(3)Sum-of-the-years-digits.(4)Declining-balance method.(5)Group and composite methods.(6)Hybrid or combination methods.Accelerated methodsAccelerated methodsSpecial methodsSpecial methodsChapter 11-10Depreci
14、ation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.charge methods of depreciation.Activity MethodIllustration 11-2Illustration 11-2Illustration:If Stanley uses the crane for 4,000 hours t
15、he first year,the depreciation charge is:Stanley Coal Stanley Coal Mines FactsMines FactsIllustration 11-3Illustration 11-3Chapter 11-11Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-charge methods of LO 3 Compare activity,straight-line,and decreasing-charge
16、 methods of depreciation.depreciation.Straight-Line MethodIllustration 11-2Illustration 11-2Illustration:Stanley computes depreciation as follows:Stanley Coal Stanley Coal Mines FactsMines FactsIllustration 11-4Illustration 11-4Chapter 11-12Depreciation-Method of Cost AllocationLO 3 Compare activity
17、,straight-line,and decreasing-charge LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.methods of depreciation.Decreasing-Charge MethodsIllustration 11-2Illustration 11-2Stanley Coal Stanley Coal Mines FactsMines FactsSum-of-the-Years-Digits.Each fraction uses the sum
18、 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.Chapter 11-13Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-charge methods of LO 3 Compare activity,straight-line,an
19、d decreasing-charge methods of depreciation.depreciation.Sum-of-the-Years-DigitsIllustration 11-6Illustration 11-6Chapter 11-14Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-charge LO 3 Compare activity,straight-line,and decreasing-charge methods of deprecia
20、tion.methods of depreciation.Decreasing-Charge MethodsIllustration 11-2Illustration 11-2Stanley Coal Stanley Coal Mines FactsMines 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 th
21、e depreciation base.Chapter 11-15Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.charge methods of depreciation.Declining-Balance MethodIllustration 11-7Illustration 11-7Chapter
22、 11-16Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-charge methods of LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.depreciation.E11-5(Depreciation ComputationsFour Methods):KC Corporation purchased a new machine for its
23、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:C
24、ompute the depreciation expense under the following methods.(a)Straight-line depreciation.(c)Sum-of-the-years-digits.(b)Activity method(d)Double-declining balance.Chapter 11-17Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-charge LO 3 Compare activity,straig
25、ht-line,and decreasing-charge methods of depreciation.methods of depreciation.Straight-line MethodChapter 11-18Depreciation-Method of Cost AllocationLO 3LO 3Activity Method(Assume 800 hours used in 2010)(Assume 800 hours used in 2010)Chapter 11-19Depreciation-Method of Cost AllocationSum-of-the-Year
26、s-Digits MethodLO 3LO 35/12=.4166677/12=.583333Chapter 11-20Depreciation-Method of Cost AllocationDouble-Declining Balance MethodLO 3LO 3Chapter 11-21Depreciation-Method of Cost AllocationLO 4 Explain special depreciation methods.LO 4 Explain special depreciation methods.The choice of method depends
27、 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 deprec
28、iation methods,provided the method results in the allocation of an assets cost in a systematic and rational manner(Hybrid or Combination Methods).Chapter 11-22Depreciation-Method of Cost AllocationLO 4 Explain special depreciation methods.LO 4 Explain special depreciation methods.Special Depreciatio
29、n Issues(1)How should companies compute depreciation for partial periods?Companies normally compute depreciation on the basis of the nearest full month.(2)Does depreciation provide for the replacement of assets?Funds for the replacement of the assets come from the revenues(3)How should companies han
30、dle revisions in depreciation rates?Chapter 11-23Changes 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.LO 4 Explain special depreciation
31、methods.Depreciation-Method of Cost AllocationChapter 11-24Arcadia HS,purchased equipment for$510,000 which was Arcadia HS,purchased equipment for$510,000 which was estimated to have a useful life of 10 years with a salvage value of estimated to have a useful life of 10 years with a salvage value of
32、$10,000 at the end of that time.Depreciation has been recorded$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 for 7 years on a straight-line basis.In 2010(year 8),it is determined that the total estimated life should be 15 yea
33、rs with a determined that the total estimated life should be 15 years with a salvage value of$5,000 at the end of that time.salvage value of$5,000 at the end of that time.Questions:Questions:l lWhat is the journal entry to correct What is the journal entry to correct the prior years depreciation?the
34、 prior years depreciation?l lCalculate the depreciation expense Calculate the depreciation expense for 2010.for 2010.No Entry No Entry RequiredRequiredChange in Estimate ExampleLO 4 Explain special depreciation methods.LO 4 Explain special depreciation methods.Chapter 11-25EquipmentEquipment$510,000
35、$510,000Fixed Assets:Fixed Assets:Accumulated depreciationAccumulated depreciation 350,000 350,000 Net book value(NBV)Net book value(NBV)$160,000$160,000Balance SheetBalance Sheet (Dec.31,2009)(Dec.31,2009)Change in Estimate ExampleAfter 7 yearsAfter 7 yearsEquipment cost Equipment cost$510,000$510,
36、000Salvage valueSalvage value -10,000 -10,000Depreciable baseDepreciable base500,000500,000Useful life(original)Useful life(original)10 years 10 yearsAnnual depreciationAnnual depreciation$50,000$50,000 x 7 years =x 7 years =$350,000$350,000 First,establish NBV First,establish NBV at date of change
37、in at date of change in estimate.estimate.LO 4 Explain special depreciation methods.LO 4 Explain special depreciation methods.Chapter 11-26Change in Estimate ExampleAfter 7 yearsAfter 7 yearsNet book value Net book value$160,000$160,000Salvage value(new)Salvage value(new)5,0005,000Depreciable baseDe
38、preciable base155,000155,000Useful life remainingUseful life remaining 8 years 8 yearsAnnual depreciationAnnual depreciation$19,375$19,375Depreciation Expense Depreciation Expense calculation for 2010.calculation for 2010.Depreciation expense 19,375Accumulated depreciation 19,375Journal entry for 20
39、10LO 4 Explain special depreciation methods.LO 4 Explain special depreciation methods.Chapter 11-27ImpairmentsLO 5 Explain the accounting issues related to asset impairment.LO 5 Explain the accounting issues related to asset impairment.When the carrying amount of an asset is not recoverable,a compan
40、y records a write-off referred to as an impairment.Events leading to an impairment:a.Decrease in the market value of an asset.b.Change in the manner in which an asset is used.c.Adverse change in legal factors or in the business climate.d.An accumulation of costs in excess of the amount originally ex
41、pected to acquire or construct an asset.e.A projection or forecast that demonstrates continuing losses associated with an asset.Chapter 11-28ImpairmentsLO 5 Explain the accounting issues related to asset impairment.LO 5 Explain the accounting issues related to asset impairment.Measuring Impairments1
42、.Review events for possible impairment.2.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 i
43、s 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.Chapter 11-29ImpairmentsLO 5 Explain the accounting issues related to asset impairment.LO 5 Explain the accounting issu
44、es related to asset impairment.Illustration 11-16Accounting for ImpairmentsChapter 11-30E11-16(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 equip
45、ment 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
46、journal entry(if any)necessary to record this increase in fair value.ImpairmentsLO 5 Explain the accounting issues related to asset impairment.LO 5 Explain the accounting issues related to asset impairment.Chapter 11-31Loss on impairment 3,600,000Accumulated depreciation 3,600,000Impairments(a).(a).
47、12/31/10LO 5 Explain the accounting issues related to asset impairment.LO 5 Explain the accounting issues related to asset impairment.Chapter 11-32Depreciation expense 1,100,000Accumulated depreciation 1,100,000Impairments(b).(b).(c).(c).Restoration of any impairment loss is not permitted.12/31/11LO
48、 5 Explain the accounting issues related to asset impairment.LO 5 Explain the accounting issues related to asset impairment.Chapter 11-33Natural resources,often called wasting assets,include petroleum,minerals,and timber.They have two main features:DepletionLO 6 Explain the accounting procedures for
49、 depletion of natural resources.LO 6 Explain the accounting procedures for depletion of natural plete removal(consumption)of the asset,and2.replacement of the asset only by an act of nature.Depletion is the process of allocating the cost of natural resources.Chapter 11-34Establishing a Depletion Bas
50、eDepletionLO 6 Explain the accounting procedures for depletion of natural resources.LO 6 Explain the accounting procedures for depletion of natural resources.Computation of the depletion base involves four factors:(1)Acquisition cost of the deposit,(2)Exploration costs,(3)Development costs,and(4)Res