Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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).
Actual Units Depreciation Depreciation Accumulated
Years Book Value
of Use Cost per unit Expenses depreciation
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

Intermediate Accounting 2:IFRS Page 1 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

2. Straight-line method.
Depreciable Depreciation Depreciation Accumulated
Years Book Value
cost Rate Expenses depreciation
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.
Depreciable Depreciation Accumulated
Years Fraction Book Value
base Expenses depreciation
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.
Book value at Depreciation Accumulated
Year Rate Book Value
beginning Expenses depreciation
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

Intermediate Accounting 2:IFRS Page 2 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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
Actual Units Depreciation Depreciation Accumulated
Years Book Value
of Use Cost per unit Expenses depreciation
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

Depreciable Depreciation Partial Depreciation Accumulated
Years cost Rate Year Expenses 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

Intermediate Accounting 2:IFRS Page 3 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

Sum of years digits 3/12 = 0.25

Depreciable Partial Depreciation Accumulated
Years base Fraction Year Expenses depreciation Book Value
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.
Book value
at Partial Depreciation Accumulated
Year beginning Rate Year Expenses depreciation Book Value
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:

Intermediate Accounting 2:IFRS Page 4 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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:
Date Accounts Dr. Cr.
Dec 31, 2011 Depreciation expenses 3,300
Accumulated depreciation 3,300

Intermediate Accounting 2:IFRS Page 5 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

Section 2:Impairment ‫النقص الحاد في قيمة األصل‬

‫القيمة االستردادية‬
‫القيمة التي يمكن الحصول عليها‬
‫من خالل األصل‬
‫سواء من‬
‫ بـيــــــع األصل‬-1
‫ استخدام األصل‬-2

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.

Intermediate Accounting 2:IFRS Page 6 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

3. Recording Impairment Loss.

Date Accounts Dr. Cr.
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

Intermediate Accounting 2:IFRS Page 7 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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

Intermediate Accounting 2:IFRS Page 8 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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 ’ ff

Intermediate Accounting 2:IFRS Page 9 of 12 Ehab Abdou 97672930

 Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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 Ready for

The Project Sale or use
Research phase Development phase
Expenses Expenses Capitalize
Economic Viability

► Accounting Treatment for Intangibles

Intermediate Accounting 2:IFRS Page 10 of 12 Ehab Abdou 97672930

Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

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.
Date Accounts Dr. Cr.
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?
Intermediate Accounting 2:IFRS Page 11 of 12 Ehab Abdou 97672930
Ch 11 : DEPRECIATION, IMPAIRMENTS, AND DEPLETION

Solution:
Multi-Diversified records this transaction as follows.
Date Accounts Dr. Cr.
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.

Intermediate Accounting 2:IFRS Page 12 of 12 Ehab Abdou 97672930