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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 Compare activity,straight-line,and decreasing-charge methods of depreciation.of 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 Explain the accounting procedures for depletion of natural resources.resources.7.7.Explain how to report and analyze property,plant,
4、equipment,Explain how to report and analyze property,plant,equipment,and natural resources.and natural resources.Learning ObjectivesChapter 11-4Depreciation DepreciationFactors involved Factors involvedMethods of Methods of depreciation depreciationSpecial methods Special methodsSpecial issues Speci
5、al issuesImpairments Impairments Depletion DepletionPresentation and Presentation and Analysis AnalysisRecognizing Recognizing impairments impairmentsMeasuring Measuring Impairments ImpairmentsRestoration of Restoration of loss lossAssets to be Assets to be disposed of disposed ofPresentation Presen
6、tationAnalysis AnalysisEstablishing a Establishing a base baseWrite-off of Write-off of resource cost resource costEstimating Estimating reserves reservesLiquidating Liquidating dividends dividendsContinuing Continuing controversy controversyDepreciation,Impairments,and DepletionChapter 11-5Allocati
7、ng 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 t
8、he use of the asset.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 depre
9、ciation process.Three 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 depreciatio
10、n process.LO 2 Identify the factors involved in the depreciation process.Depreciable BaseFactors Involved in the Depreciation ProcessIllustration 11-1 Illustration 11-1Chapter 11-8Depreciation-Method of Cost AllocationLO 2 Identify the factors involved in the depreciation process.LO 2 Identify the f
11、actors involved in the depreciation process.Estimation of Service LifesFactors Involved in the Depreciation Process Service 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 fact
12、ors(obsolescence).Chapter 11-9Depreciation-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.The profession requires the method employed be“systematic and ration
13、al.”Examples include:Methods 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 methods Accelerated methodsSpecial methods Special met
14、hodsChapter 11-10Depreciation-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 11-2 Illustration 11-2Illustration:If Stanley uses th
15、e crane for 4,000 hours the first year,the depreciation charge is:Stanley Coal Stanley Coal Mines Facts Mines FactsIllustration 11-3 Illustration 11-3Chapter 11-11Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-LO 3 Compare activity,straight-line,and decreasi
16、ng-charge methods of depreciation.charge methods of depreciation.Straight-Line MethodIllustration 11-2 Illustration 11-2Illustration:Stanley computes depreciation as follows:Stanley Coal Stanley Coal Mines Facts Mines FactsIllustration 11-4 Illustration 11-4Chapter 11-12Depreciation-Method of Cost A
17、llocationLO 3 Compare activity,straight-line,and decreasing-LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.charge methods of depreciation.Decreasing-Charge MethodsIllustration 11-2 Illustration 11-2Stanley Coal Stanley Coal Mines Facts Mines FactsSum-of-the-Years-D
18、igits.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.Chapter 11-13Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-LO 3 Compare activity,st
19、raight-line,and decreasing-charge methods of depreciation.charge methods of depreciation.Sum-of-the-Years-DigitsIllustration 11-6 Illustration 11-6Chapter 11-14Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing-LO 3 Compare activity,straight-line,and decreasing-
20、charge methods of depreciation.charge methods of depreciation.Decreasing-Charge MethodsIllustration 11-2 Illustration 11-2Stanley Coal Stanley Coal Mines Facts Mines FactsDeclining-Balance Method.Utilizes a depreciation rate(percentage)that is some multiple of the straight-line method.Does not deduc
21、t the salvage value in computing the 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 MethodIllust
22、ration 11-7 Illustration 11-7Chapter 11-16Depreciation-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.E11-5(Depreciation ComputationsFour Methods):KC Corporat
23、ion 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.Ye
24、ar-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.Chapter 11-17Depreciation-Method of Cost AllocationLO 3 Compare activity,straight-line,and decreasing
25、-LO 3 Compare activity,straight-line,and decreasing-charge methods of depreciation.charge methods of depreciation.Straight-line MethodChapter 11-18Depreciation-Method of Cost AllocationLO 3 LO 3Activity Method(Assume 800 hours used in 2010)(Assume 800 hours used in 2010)Chapter 11-19Depreciation-Met
26、hod of Cost AllocationSum-of-the-Years-Digits MethodLO 3 LO 35/12=.4166677/12=.583333Chapter 11-20Depreciation-Method of Cost AllocationDouble-Declining Balance MethodLO 3 LO 3Chapter 11-21Depreciation-Method of Cost AllocationLO 4 Explain special depreciation methods.LO 4 Explain special depreciati
27、on 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
28、also free to develop tailor-made depreciation 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 d
29、epreciation methods.Special Depreciation 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
30、the revenues(3)How should companies handle 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 met
31、hods.LO 4 Explain special depreciation methods.Depreciation-Method of Cost AllocationChapter 11-24Arcadia HS,purchased equipment for$510,000 which Arcadia HS,purchased equipment for$510,000 which was estimated to have a useful life of 10 years with a was estimated to have a useful life of 10 years w
32、ith a salvage value of$10,000 at the end of that time.salvage value of$10,000 at the end of that time.Depreciation has been recorded for 7 years on a Depreciation has been recorded for 7 years on a straight-line basis.In 2010(year 8),it is determined straight-line basis.In 2010(year 8),it is determi
33、ned that the total estimated life should be 15 years with a 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 l What is the journal entry to correct What is the journal entry to
34、correct the prior years depreciation?the prior years depreciation?l l Calculate the depreciation expense Calculate the depreciation expense for 2010.for 2010.No Entry No Entry Required RequiredChange in Estimate ExampleLO 4 Explain special depreciation methods.LO 4 Explain special depreciation metho
35、ds.Chapter 11-25Equipment Equipment$510,000$510,000Fixed Assets:Fixed Assets:Accumulated depreciation Accumulated depreciation 350,000 350,000 Net book value(NBV)Net book value(NBV)$160,000$160,000Balance Sheet Balance Sheet(Dec.31,2009)(Dec.31,2009)Change in Estimate Example After 7 years After 7 y
36、earsEquipment cost Equipment cost$510,000$510,000Salvage value Salvage value-10,000-10,000Depreciable base Depreciable base 500,000 500,000Useful life(original)Useful life(original)10 years 10 yearsAnnual depreciation Annual depreciation$50,000$50,000 x 7 years=x 7 years=$350,000$350,000 First,estab
37、lish First,establish NBV at date of NBV at date of change in estimate.change in estimate.LO 4 Explain special depreciation methods.LO 4 Explain special depreciation methods.Chapter 11-26Change in Estimate Example After 7 years After 7 yearsNet book value Net book value$160,000$160,000Salvage value(n
38、ew)Salvage value(new)5,000 5,000Depreciable base Depreciable base 155,000 155,000Useful life remaining Useful life remaining 8 years 8 yearsAnnual depreciation Annual depreciation$19,375$19,375Depreciation Depreciation Expense calculation Expense calculation for 2010.for 2010.Depreciation expense 19
39、,375Accumulated depreciation 19,375Journal entry for 2010LO 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
40、carrying amount of an asset is not recoverable,a company 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 accu
41、mulation of costs in excess of the amount originally expected 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 is
42、sues related to asset impairment.Measuring Impairments1.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
43、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.Chapter 11-29ImpairmentsLO 5 Explain the accounting issues relat
44、ed to asset impairment.LO 5 Explain the accounting issues 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 th
45、is 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
46、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.LO 5 Explain the accounting issues related to asset impairment.Chapter 11-31Loss on impairment 3,600,0
47、00Accumulated depreciation 3,600,000Impairments(a).(a).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).Restora
48、tion of any impairment loss is not permitted.12/31/11LO 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 featu
49、res:DepletionLO 6 Explain the accounting procedures for 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 natu
50、ral resources.Chapter 11-34Establishing a Depletion BaseDepletionLO 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 depo