Unformatted text preview: d to asset impairment. Impairments
Accounting for Impairments Note: The test for impairment begins with an
assessment of the non discounted cash flows from
an asset. Most individual assets do not have cash
flows associated with them. Accordingly, the
impairment test must be implemented at a broad
enough, high enough level, so that there exists the
ability to assess cash flows from a group of assets
employed in those operations Chapter
18-33 LO 5 Explain the accounting issues related to asset impairment. Impairments
E11-16 (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 equipment has a remaining useful life of 4 years. Instructions: Cost
A ccumulat ed depr eciat ion t o dat e
Expect ed f ut ur e net cash f lows
Fair value $ 9, 000, 000
1, 000, 000
7, 000, 000
4, 400, 000 (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 journal entry (if any) necessary to record this increase in fair value. Chapter
18-34 LO 5 Explain the accounting issues related to asset impairment. Impairments
(a). Cost $ 9, 000, 000 Accumulat ed depr eciat ion 1, 000, 000 Car r ying amount 8, 000, 000 Fair value 4, 400, 000 Loss on impair ment $ 3, 600, 000 12/31/10
Loss on impairment Accumulated depreciation Chapter
3,600,000 LO 5 Explain the accounting issues related to asset impairment. Impairments
(b). Net car r ying amount $ 4, 400, 000 Usef ul lif e
Depr eciat ion per year 4 year s
$ 1, 100, 000 12/31/11
Depreciation expense 1,100,000 Accumulated depreciation 1,100,000 (c). Restoration of any impairment loss is not permitted.
18-36 LO 5 Explain the accounting issues related to asset impairment. 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
18-37 LO 6 Explain the accounting procedures for depletion of natural resources. 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
18-38 LO 6 Explain the accounting procedures for depletion of natural resources. 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.
Total cost – Salvage value
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