ch 11 : depreciation, impairments, and depletion - financial accounting … · 2019-01-28 · ch 11...

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

Intermediate Accounting 2:IFRS 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



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



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



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



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



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


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



Sum of years digits

3/12 = 0.25

Years Depreciable

base Fraction Partial Year



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



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:



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:


Dec 31, 2011 Depreciation expenses 3,300 Accumulated depreciation 3,300



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



3. Recording Impairment Loss.


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



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



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 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



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.


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?



Solution: Multi-Diversified records this transaction as follows.


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.

ch 11 : depreciation, impairments, and depletion - financial accounting … · 2019-01-28 · ch 11...

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