SB-BMGT310-sess24 and 25_ch11

SB-BMGT310-sess24 and 25_ch11 - Depreciation, Impairments,...

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Unformatted text preview: Depreciation, Impairments, and Depreciation, Impairments, and Depletion Depletion Chapter 11 Chapter 11-1 Initially Prepared by Coby Harmon, University of California, Santa Barbara modified by Stephen Brown Learning Objectives Learning Objectives 1. 2. 3. 4. 5. 6. 7. Explain the concept of depreciation. Identify the factors involved in the depreciation process. Compare activity, straightline, and decreasingcharge 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. Chapter 11-2 Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Depreciation 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. Allocating costs of longterm assets: Fixed assets = Depreciation expense Intangibles = Amortization expense Natural resources = Depletion expense Chapter 11-3 LO 1 Explain the concept of depreciation. Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Factors Involved in the Depreciation Process Three basic questions: (1) (2) (3) What depreciable base is to be used? What is the asset's useful life? What method of cost allocation is best? Chapter 11-4 LO 2 Identify the factors involved in the depreciation process. Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Methods of Depreciation The profession requires the method employed be "systematic and rational." Examples include: (1) (2) (3) (4) (5) (6) Activity method (units of use or production). Straightline method. Sumoftheyears'digits. Decliningbalance method. Group and composite methods. Hybrid or combination methods. Accelerated methods Special methods Chapter 11-5 LO 3 Compare activity, straight-line, and decreasingcharge methods of depreciation. Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Exercise (Depreciation Computations--Four Methods) Robert Parish Corporation purchased a new machine for its assembly process on September 30, 20x2. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Yearend is December 31. Instructions: Compute the depreciation expense under the following methods for each year of the asset's life. (a) Straightline depreciation. (b) Activity method. (c) Sumoftheyears'digits. (d) Doubledeclining balance. Chapter 11-6 LO 3 Compare activity, straight-line, and decreasingcharge methods of depreciation. Depreciation Class Examples Depreciation Class Examples Chapter 11-7 Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Special Depreciation Methods The choice of method depends on the nature of the assets involved: Group 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 tailormade depreciation methods, provided the method results in the allocation of an asset's cost in a systematic and rational manner (Hybrid or Combination Methods). Chapter 11-8 LO 4 Explain special depreciation methods. Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Special Depreciation Issues (1) How should companies compute depreciation for partial periods? Companies normally compute depreciation on the basis of the nearest full month. (1) (1) Does depreciation provide for the replacement of assets? Funds for the replacement of the assets come from the revenues How should companies handle revisions in depreciation rates? Chapter 11-9 LO 4 Explain special depreciation methods. Depreciation -- Method of Cost Allocation Depreciation Method of Cost Allocation Changes in Depreciation Rate Accounted for in the period of change and future periods (Change in Estimate) Not handled retrospectively Not considered errors or extraordinary items Chapter 11-10 LO 4 Explain special depreciation methods. Change in Estimate Example Change in Estimate Example Arcadia 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 straightline basis. In 20x5 (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? No Calculate the depreciation expense for 2005. Entry Required Chapter 11-11 LO 4 Explain special depreciation methods. Change in Estimate Example Change in Estimate Example Equipment cost Salvage value Depreciable base Useful life (original) Annual depreciation After 7 years $510,000 First, establish NBV at First, establish NBV at 10,000 date of change in estimate. date of change in estimate. 500,000 10 years $ 50,000 x 7 years = $350,000 Balance Sheet (Dec. 31, 20x4) $510,000 350,000 $160,000 LO 4 Explain special depreciation methods. Fixed Assets: Equipment Accumulated depreciation Net book value (NBV) Chapter 11-12 Change in Estimate Example Change in Estimate Example Net book value Salvage value (new) Depreciable base Useful life remaining Annual depreciation Journal entry for 20x5 Depreciation expense Accumulated depreciation Chapter 11-13 After 7 years Depreciation Expense Depreciation Expense calculation for 20x5. calculation for 20x5. $160,000 5,000 155,000 8 years $ 19,375 19,375 19,375 LO 4 Explain special depreciation methods. Change in Estimated Depreciation Change in Estimated Depreciation Class Examples Class Examples Chapter 11-14 Impairments Impairments When the carrying amount of an asset is not recoverable, a company records a writeoff referred to as an impairment. Events leading to an impairment: a. b. c. d. e. Chapter 11-15 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. LO 5 Explain the accounting issues related to asset impairment. Impairments Impairments Measuring Impairments 1. 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 longlived 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. Chapter 11-16 LO 5 Explain the accounting issues related to asset impairment. Impairments Impairments Illustration 11-16 Accounting for Impairments Chapter 11-17 LO 5 Explain the accounting issues related to asset impairment. Impairments Impairments Class Examples Class Examples Chapter 11-18 Depletion Depletion Natural resources, often called wasting assets, include petroleum, minerals, and timber. They have two main features: 1. complete removal (consumption) of the asset, and 2. replacement of the asset only by an act of nature. Depletion is the process of allocating the cost of natural resources. Chapter 11-19 LO 6 Explain the accounting procedures for depletion of natural resources. Depletion Depletion Establishing a Depletion Base Computation of the depletion base involves four factors: (1) Acquisition cost of the deposit, (2) Exploration costs, (3) Development costs, and (4) Restoration costs. Chapter 11-20 LO 6 Explain the accounting procedures for depletion of natural resources. Depletion Depletion Write-off of Resource Cost 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 value Total estimated units available Units extracted x Cost per unit Chapter 11-21 = Depletion cost per unit = Depletion LO 6 Explain the accounting procedures for depletion of natural resources. Depletion Depletion Continuing Controversy Oil and Gas Industry: Full cost concept Successful efforts concept Special Problems in Depletion Accounting 1. Difficulty of estimating recoverable reserves. 2. Problems of discovery value. 3. Tax aspects of natural resources. 4. Accounting for liquidating dividends. Chapter 11-22 LO 6 Explain the accounting procedures for depletion of natural resources. Modified Accelerated Cost Recovery System MACRS differs from GAAP in three respects: 1. a mandated tax life, which is generally shorter than the economic life; 2. cost recovery on an accelerated basis; and 3. an assigned salvage value of zero. Chapter 11-23 LO 8 Describe income tax methods of depreciation. Modified Accelerated Cost Recovery System Tax Lives (Recovery Periods) Illustration 11A-1 Chapter 11-24 LO 8 Describe income tax methods of depreciation. Modified Accelerated Cost Recovery System Tax Depreciation Methods Illustration 11A-2 Chapter 11-25 LO 8 Describe income tax methods of depreciation. Modified Accelerated Cost Recovery System Illustration: Computer and peripheral equipment purchased by Denise Rode Company on January 1, 2009. Chapter 11-26 LO 8 Describe income tax methods of depreciation. Modified Accelerated Cost Recovery System Illustration: Illustration 11A-3 Chapter 11-27 LO 8 Describe income tax methods of depreciation. Modified Accelerated Cost Recovery System Illustration: Using the rates from the MACRS depreciation rate schedule for a 5year class of property, Rode computes depreciation as follows Illustration 11A-4 Illustration 11A-5 Chapter 11-28 LO 8 Describe income tax methods of depreciation. Modified Accelerated Cost Recovery System Additional Issues Optional straightline method Tax versus book depreciation Chapter 11-29 LO 8 Describe income tax methods of depreciation. ...
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