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CHAPTER 11
QUESTIONS
1. Depreciation refers to the cost allocation of
tangible long-term assets, depletion refers
to the cost allocation of natural resources,
and amortization refers to the cost allocation of intangible assets. All three terms
have similar underlying principles governing their use.

productive output or service hours. In theory, the use-factor methods provide a much
better matching of costs against revenues
than do time-factor methods. However, because use-factor methods require more extensive accounting records, they are not as
common as the time-factor methods.

2. Four separate factors must be considered
in determining the periodic depreciation
charges that should be made for a company’s assets. They are (1) asset cost, (2)
residual or salvage value, (3) useful life,
and (4) pattern of use. These factors, when
considered together, help determine which
of the common methods is most appropriate for the circumstances.

6. With group depreciation, periodic depreciation expense is computed on a whole group
of assets as if the group were one single
asset. The weighted-average life of the
group is used to determine how much of
the aggregate asset cost should be depreciated each year. No gains or losses are
recognized at the time of the retirement of
individual assets; accumulated depreciation
is reduced for the difference between the

asset cost and the cash retirement proceeds.

3. Residual or salvage value is included in the
formulas for all time-factor depreciation methods except for the declining-balance methods. In practice, residual value is often
ignored if it is the practice of a company to
retain assets for most of their useful lives.
In the case of declining-balance methods,
although residual value is not included in
the formulas, it is considered when an asset is near the end of its useful life. Generally, the book value should not be reduced
below its expected residual value.

7. Some items of property, plant, and equipment
are composed of identifiable subitems, or
components, with substantially different useful lives or usage patterns. The component
approach to depreciation is to depreciate
each component separately. The component
approach is allowed in the United States and
is required under IAS 16.
8. The amount of an asset retirement obligation is added to the cost of the associated
asset. Accordingly, the asset retirement obligation increases periodic depreciation. In
addition, the amount of the asset retirement
obligation itself increases each year as the
time until the obligation must be satisfied
decreases. However, this increase, which
conceptually is exactly the same as interest
expense, is not accounted for as interest
expense. Instead, it is called accretion expense.

4. Functional factors include inadequacy and
obsolescence that reduce the usefulness of

the asset. Physical factors include wear
and tear, deterioration and decay, and
damage or destruction reducing the usefulness of the asset.
5. Time-factor methods of depreciation base
cost allocation on time according to either
straight-line or accelerated depreciation. In
theory, the pattern selected should be related to the pattern of benefits expected
from the asset. Because the pattern of
benefits is very subjective, the selection of
a specific time-factor method is usually an
arbitrary decision.
Use-factor methods of depreciation base
cost allocation on some measure that relates more directly to the use of the asset.
Most commonly, the allocation is based on

9. When a useful-life estimate is changed, the
remaining book value of the asset is depreciated over the revised remaining useful life.
In other words, the estimate impacts only
the current and future periods. No attempt is
made to go back and “fix” the depreciation
amount recognized in prior periods.

425


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10. When new estimates of recoverable natural
resources are obtained, a new depletion
cost per basic unit is computed from the
beginning of the period in which the new
estimate is made. No adjustment is made
to prior periods. It is a change in estimate
and therefore prospective in nature.

b. If the fair value of the reporting unit exceeds the net book value of the assets
and liabilities of the reporting unit, the
goodwill is assumed to not be impaired
and no impairment loss is recognized.
c. If the fair value of the reporting unit is
less than the net book value of the assets and liabilities of the reporting unit,
a new fair value of goodwill is computed. The goodwill value is the
amount of fair value of a reporting unit
that is left over after the values of all
identifiable assets and liabilities of the
reporting unit have been considered.
d. If the implied amount of goodwill computed in (c) is less than the amount initially recorded, a goodwill impairment
loss is recognized for the difference.

11. A company should recognize an impairment loss when the undiscounted sum of
expected future cash flows from the asset
is less than the recorded book value of the
asset. The impairment loss is measured as
the difference between the book value of
the asset and the asset’s fair value. Fair
value can be estimated as the discounted
sum of expected future cash flows.

12. IAS 36 differs from U.S. GAAP in that the
discounted sum of future cash flows, rather
than the undiscounted sum, is used to determine whether an impairment loss exists.
13. If a non-U.S. company chooses to revalue
a long-term operating asset upward in accordance with IAS 16, the unrealized
“gain” on the revaluation is recognized as
a revaluation equity reserve. This equity
reserve increases the reported amount of
equity but is not shown as a gain in the income statement.
14. For accounting purposes, recorded intangible assets come in three varieties:
a. Intangible assets that are amortized.
The impairment test for these intangibles is the same as the 2-step test
used for tangible long-term operating
assets.
b. Intangible assets that are not amortized. The impairment test for these intangibles involves a simple 1-step
comparison of the book value to the fair
value.
c. Goodwill, which is not amortized. The
goodwill impairment test is a 4-step
process that first involves estimating
the fair value of the entire reporting unit
to which the goodwill is allocated.
15. a. Compute the fair value of each reporting unit to which goodwill has been assigned.

16. Under IAS 36, the general structure of the
impairment test for intangible assets is that
the recorded amount of the intangible asset
is compared to its “recoverable amount.”
17. a. No depreciation is to be recognized.
b. The asset is to be reported at the lower

of its book value or its fair value (less
the estimated cost to sell).
18. A gain or loss is recognized whenever an
exchange of assets takes place unless the
exchange does not affect the risk, timing, or
amount of a company’s cash flows. In
those instances where the transaction lacks
“commercial substance,” indicated gains
are not recognized unless a small amount
of cash is received. Indicated losses are
always recognized.
‡

19. Depreciation is an estimate, and the effort
necessary to compute depreciation expense for the exact number of days an asset is owned usually exceeds any benefit
derived. For companies that acquire and
dispose of many assets during a year, detailed tracking of daily depreciation is almost impossible. A variety of simplifying
assumptions are used, including rounding
to the nearest whole month and the halfyear convention in which one-half of a
year’s depreciation is taken on any asset
acquired or disposed of during the year.

‡

Relates to Expanded Material.


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427

‡

in just a few classes and through the ignoring of salvage values. Acceleration of tax
depreciation deductions comes through
shortened asset lives and use of accelerated depreciation methods like doubledeclining-balance.

20. The original reasons for the development of
the ACRS income tax depreciation method
were simplification of the tax depreciation
computations and acceleration of tax depreciation deductions to reduce income
taxes and stimulate investment. Simplification comes through the grouping of assets
‡

Relates to Expanded Material.


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PRACTICE EXERCISES
PRACTICE 11–1

RECORDING DEPRECIATION EXPENSE

Depreciation Expense ...............................................................................
Accumulated Depreciation..................................................................

PRACTICE 11–2

1,000
1,000

COMPUTING STRAIGHT-LINE DEPRECIATION

1.

($108,000 – $20,000)/5 years = $17,600 annual depreciation expense

2.

Depreciation Expense ........................................................................
Accumulated Depreciation...........................................................

3.

17,600
17,600

Book value: $108,000 – $17,600 = $90,400

PRACTICE 11–3

COMPUTING SUM-OF-THE-YEARS’-DIGITS DEPRECIATION

1. and 2.
Year
1

2
3
4
5

Computation
($115,000 – $20,000) × (5/15)
($115,000 – $20,000) × (4/15)
($115,000 – $20,000) × (3/15)
($115,000 – $20,000) × (2/15)
($115,000 – $20,000) × (1/15)

PRACTICE 11–4

Depreciation
Amount
$31,667
25,333
19,000
12,667
6,333

Accumulated
Depreciation
$31,667
57,000
76,000
88,667
95,000


Book
Value
$83,333
58,000
39,000
26,333
20,000

COMPUTING DOUBLE-DECLINING-BALANCE DEPRECIATION

1. and 2.
Double-declining-balance percentage: (100%/4 years) × 2 = 50%
Year
1
2
3
4

Computation
$100,000 × 0.50
$50,000 × 0.50
$25,000 × 0.50
$12,500 – $10,000

Depreciation
Amount
$50,000
25,000
12,500
2,500


Accumulated
Depreciation
$50,000
75,000
87,500
90,000

Book
Value
$50,000
25,000
12,500
10,000

The depreciation amount in the final year is the amount that reduces the machine’s
book value to equal the estimated residual value.


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PRACTICE 11–5

COMPUTING SERVICE-HOURS DEPRECIATION

1. and 2.
Rate per service hour: [($81,000 – $15,000)/20,000 hours] = $3.30 per hour

Year
1
2
3
4

Computation
9,000 hours × $3.30 per hour
5,000 hours × $3.30 per hour
4,000 hours × $3.30 per hour
2,000 hours × $3.30 per hour

PRACTICE 11–6

Depreciation
Amount
$29,700
16,500
13,200
6,600

Accumulated
Depreciation
$29,700
46,200
59,400
66,000

Book
Value

$51,300
34,800
21,600
15,000

COMPUTING PRODUCTIVE-OUTPUT DEPRECIATION

1. and 2.
Rate per unit: [($70,000 – $5,000)/13,000 units)] = $5 per unit
Year
1
2
3
4

Computation
3,000 units × $5 per unit
5,000 units × $5 per unit
2,000 units × $5 per unit
3,000 units × $5 per unit

PRACTICE 11–7

Asset 1
Asset 2
Asset 3
Asset 4
Totals

Depreciation

Amount
$15,000
25,000
10,000
15,000

Accumulated
Depreciation
$15,000
40,000
50,000
65,000

Book
Value
$55,000
30,000
20,000
5,000

COMPUTING GROUP DEPRECIATION
Acquisition
Cost
$ 64,000
90,000
42,000
30,000
$226,000

Salvage

Value
$ 4,000
10,000
6,000
0

Useful
Life
6 years
10
9
5

Expense
$10,000
8,000
4,000
6,000
$28,000

$28,000/$226,000 = 0.12389
This percentage is applied to the total original cost of all assets in the group in order to
compute total annual depreciation expense.


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PRACTICE 11–8
1.

GROUP DEPRECIATION: RECORDING ASSET SALES

With group depreciation, gains and losses are typically not recognized on the sale
of individual assets.
Cash .....................................................................................................
Accumulated Depreciation ................................................................
Asset 3 ...........................................................................................

22,000
20,000
42,000

Accumulated Depreciation is the plug figure in this entry. We assume that the
overall depreciation policy is accurate, so no gains or losses are recorded when
disposing of group assets.
2.

The group rate percentage is normally left the same unless there is persuasive
evidence for the need of a change.
($64,000 + $90,000 + $30,000 + $50,000) × 0.12389 = $28,990

PRACTICE 11–9

ASSET RETIREMENT OBLIGATION

The present value of the asset retirement obligation is computed as follows:
Business calculator keystrokes:

FV = $250,000; I = 6%; N = 12 years → $124,242
The total cost of the landfill site is $649,242 = $525,000 + $124,242
Depreciation expense: $649,242/12 years = $54,104
Accretion expense: $124,242 × 0.06 = $7,455
PRACTICE 11–10
1.

COMPUTING DEPLETION EXPENSE

Depletion rate = (January 1 cost – Residual value)/January 1 tons
($100,000 – $20,000)/5,000 tons = $16.00 per ton
900 tons × $16.00 per ton = $14,400 depletion expense

2.

Depletion Expense .............................................................................
Accumulated Depletion (or Mine)................................................

PRACTICE 11–11

CHANGE IN ESTIMATED LIFE

Annual depreciation using the original estimates:
($40,000 – $4,000)/9 years = $4,000 annual depreciation expense
Total accumulated depreciation after three years:
$4,000 annual depreciation expense × 3 years = $12,000

14,400
14,400



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PRACTICE 11–11

431

(Concluded)

Remaining useful life after three years:
New estimate of 7 years – 3 years already elapsed = 4 years remaining
Annual depreciation using the revised estimates in the fourth year:
[($40,000 – $12,000 accumulated depreciation) – $8,000]/4 years = $5,000 annual
depreciation expense
PRACTICE 11–12
1.

CHANGE IN ESTIMATED UNITS OF PRODUCTION

Depletion rate for Year 1 = January 1 cost/January 1 tons
$300,000/2,000 tons = $150.00 per ton
900 tons × $150.00 per ton = $135,000 depletion expense

2.

Depletion rate for Year 2 = January 1 cost/January 1 tons
($300,000 – $135,000 + $120,000)/(600 tons + 700 tons) = $219.23 per ton
600 tons × $219.23 per ton = $131,538


PRACTICE 11–13

CHANGE IN DEPRECIATION METHOD

Annual depreciation using the original estimates:
($80,000 – $8,000)/8 years = $9,000 annual depreciation expense
Total accumulated depreciation after three years:
$9,000 annual depreciation expense × 3 years = $27,000
Book value at the end of three years:
$80,000 – $27,000 = $53,000
Straight-line rate – 100%/5 = 20%
Double the straight-line rate: 20% × 2 = 40%
Year 4 depreciation expense: $53,000 × 40% = $21,200
PRACTICE 11–14

DETERMINING WHETHER A TANGIBLE ASSET IS IMPAIRED

The equipment is not impaired. The relevant comparison is the book value of the
asset to the sum of the expected future cash flows.
Sum of future cash flows ($65,000 × 14 years)
Book value ($1,500,000 – $600,000)

$910,000
900,000

Because the sum of future cash inflows is more than the book value of the asset, no
impairment has occurred. In testing for impairment, the current value of the asset is
not used. Therefore, the equipment should continue to be reported in the company’s
books at its net book value of $900,000.



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PRACTICE 11–15
1.

RECORDING A TANGIBLE ASSET IMPAIRMENT

The building is impaired. The relevant comparison is the book value of the building
to the sum of the expected future cash flows.
Sum of future cash flows ($40,000 × 30 years)
Book value ($1,500,000 – $250,000)

$1,200,000
1,250,000

Because the sum of future cash inflows is less than the book value of the asset,
the building is impaired.
2.

Accumulated Depreciation ................................................................ 250,000
Loss on Impairment ($1,250,000 – $600,000)................................... 650,000
Building..........................................................................................
900,000

PRACTICE 11–16


RECORDING UPWARD ASSET REVALUATIONS

Building ($730,000 – $500,000).......................................................... 230,000
Accumulated Depreciation ................................................................ 40,000
Revaluation Equity Reserve ........................................................
270,000
PRACTICE 11–17

RECORDING AMORTIZATION EXPENSE

Amortization Expense........................................................................
Accumulated Amortization ..........................................................

62,500
62,500

$250,000/4 years = $62,500 annual amortization expense
(Note: Straight-line amortization is used unless there is compelling evidence for
using another method.)
PRACTICE 11–18

GOODWILL IMPAIRMENT

Estimated fair value of the Manufacturing reporting unit:
Present value of $700 per year for 10 years at 10% = $4,301
With a business calculator:
Make sure to toggle so that the payments are assumed
to occur at the end (END) of the period.
PMT = $700; N = 10; I = 10% → PV = $4,301
Net book value of the assets and liabilities of the Manufacturing reporting unit:

Assets ($7,000 + $2,000) – Liabilities ($4,000) = $5,000
Because the estimated fair value of the reporting unit ($4,301) is less than the net book
value of the reporting unit ($5,000), further computations are needed to determine the
amount of a goodwill impairment loss, if any.


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PRACTICE 11–18

433

(Concluded)

Implied fair value of goodwill as of December 31:
Fair value of identifiable assets + Fair value of goodwill – Fair value of liabilities =
Total fair value
$8,000 + Fair value of goodwill – $4,000 = $4,301
Fair value of goodwill = $301
Journal entry necessary to recognize the goodwill impairment loss:
Goodwill Impairment Loss.................................................................
Goodwill ($2,000 – $301) ..............................................................
PRACTICE 11–19

1,699
1,699

EXCHANGE OF ASSETS


1.

Land ..................................................................................................... 400,000
Accumulated Depreciation ................................................................ 340,000
Gain on Exchange ($400,000 – $360,000) ...................................
40,000
Building..........................................................................................
700,000

2.

Land ..................................................................................................... 200,000
Accumulated Depreciation ................................................................ 340,000
Loss on Exchange ($360,000 – $200,000) ........................................ 160,000
Building..........................................................................................
700,000

PRACTICE 11–20

CLASSIFYING AN ASSET AS HELD FOR SALE

1.

Building—Held for Sale ($145,000 – $9,000) .................................... 136,000
Loss on Held-for-Sale Classification ................................................ 14,000
Accumulated Depreciation—Building .............................................. 225,000
Building..........................................................................................
375,000

2.


Building Held for Sale ........................................................................
Gain on Recovery of Value—Held for Sale.................................

14,000
14,000

Computation of gain: ($170,000 – $9,000) – $136,000 = $25,000; maximum gain that
can be recognized is the amount of the initial loss recognized upon classification
as held for sale = $14,000.
PRACTICE 11–21
1.

EXCHANGE OF ASSETS

New Asset............................................................................................
Accumulated Depreciation (old asset) .............................................
Old Asset .......................................................................................

150
850
1,000


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PRACTICE 11–21

2.

3.

(Concluded)

Cash .....................................................................................................
New Asset............................................................................................
Accumulated Depreciation (old asset) .............................................
Gain on Exchange ($400 – $150 book value) .............................
Old Asset .......................................................................................

300
100
850

Cash .....................................................................................................
New Asset............................................................................................
Accumulated Depreciation (old asset) .............................................
Gain on Exchange.........................................................................
Old Asset .......................................................................................

80
120
850

250
1,000

50

1,000

Market value of old asset = $400
Indicated gain on exchange of old asset = $400 – $150 book value = $250 implied
gain
Recognized gain = [$80/($80 + $320)] × $250 = $50
Recorded asset value = $320 less deferred gain of $200 = $120
PRACTICE 11–22
1.

‡

DEPRECIATION FOR PARTIAL PERIODS

Depreciation expense this year:
($100,000 – $15,000) × (5/15) × (9/12) = $21,250
Depreciation expense next year:
($100,000 – $15,000) × (4.25/15) = $24,083

2.

Double-declining-balance percentage: (100%/5 years) × 2 = 40%
Depreciation expense this year:
$100,000 × 0.40 × (9/12) = $30,000
Depreciation expense next year:
($100,000 – $30,000) × 0.40 = $28,000

PRACTICE 11–23

‡


INCOME TAX DEPRECIATION

According to the MACRS class-life definitions, ships are 10-year property, and 200%
declining-balance depreciation, with a half-year convention, is used.
Double-declining-balance percentage: (1.00/10 years) × 2 = 0.20, or 20%
Depreciation deduction this year:
$850,000 × 0.20 × (6/12) = $85,000
Depreciation deduction next year:
($850,000 – $85,000) × 0.20 = $153,000
‡

Relates to Expanded Material.


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435

EXERCISES
11–24.

1. Purchase price ...................................................
Freight costs.......................................................
Installation costs................................................
Machine cost ......................................................

$38,400
3,000

1,600
$43,000

2. (a) Straight-line method: ($43,000 – $600) × 1/8 = $5,300
(b) Service-hours method: ($43,000 – $600) = $1.33 * per hr. × 3,000 hrs.
32,000 hours
used = $3,990
*Rounded
11–25.
Purchase of mixer:
2013
Jan. 1 Mixing Equipment................................................
Prepaid Maintenance ..........................................
Cash ................................................................
To record purchase of mixer.

54,000
3,000
57,000

Dec. 31 Depreciation Expense .........................................
6,750*
Accumulated Depreciation—Mixing
Equipment ......................................................
To record depreciation for year.
*($54,000/20,000 = $2.70 per hour × 2,500 hrs. = $6,750)
31 Maintenance Expense .........................................
Prepaid Maintenance.....................................
Assume written off over two years of
contract.


1,500
1,500

2014
Dec. 31 Depreciation Expense .........................................
8,100*
Accumulated Depreciation—Mixing
Equipment ......................................................
*($54,000/20,000 = $2.70 per hour × 3,000 hrs. = $8,100)
31 Maintenance Expense .........................................
Prepaid Maintenance.....................................

6,750

8,100

1,500
1,500


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11–26.

1. Equipment:
Total depreciable cost

Annual depreciation expense

($680,000 − $68,000)
($250,000 − $160,000)
2. Buildings:
Total depreciable cost
Annual depreciation expense
($2,450,000 − $245,000)
($340,000 − $230,000)

= Average useful life
= 6.8 years

= Average useful life
= 20.0 years

11–27.

1. Double-declining-balance method:
$196,000 × 0.22222 × 6/12 = $21,778
2. Productive-output method:
$ 196,000
– 20,000
$ 176,000/375,000 yds. = $0.46933 × 49,500 yds. = $23,232
3. Service-hours method:
$ 196,000
– 20,000
$ 176,000/50,000 hrs. = $3.52 × 6,500 hrs. = $22,880
4. Straight-line method:
$ 196,000

– 20,000
$ 176,000 × 0.1111 × 6/12 = $9,777
The productive-output method allows the greatest depreciation expense for
2013.

11–28.

1.

Depreciation rate per
thousand units produced:

End of
Year
2011
2012
2013

Unit
Output

$100,000 − $4,000
= $320
300

Depreciation Expense

80,000 (80 × $320) = $25,600
120,000 (120 × 320) = 38,400
40,000 (40 × 320) = 12,800

240,000
$76,800

Balance of
Accumulated
Depreciation
$25,600
64,000
76,800

2. Accumulated Depreciation—Equipment ..........................
Loss on Disposal of Damaged Equipment.......................
Equipment......................................................................
To write off damaged equipment.

Asset
Book Value
$100,000
74,400
36,000
23,200
76,800
23,200
100,000


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11–29.


437

Description
Delivery truck .........
Circular saws .........
Workbench .............
Forklift.....................
Totals ..................

Cost
$37,000
725
460
11,000
$49,185

Salvage
$8,000
180
0
950
$9,130

Base
$29,000
545
460
10,050
$40,055


Life
7 yrs.
5
10
6

Depr.
$4,143
109
46
1,675
$5,973

1. $5,973
2. $5,973/$49,185 = 12.14%
3. $40,055/$5,973 = 6.7 years
11–30.

1. 2013 Furniture .........................................................
Cash .............................................................
Cash ................................................................
Accumulated Depreciation—Furniture........
Furniture ......................................................
Depreciation Expense ...................................
Accumulated Depreciation—Furniture .....
*[($125,000 + $35,000 – $27,000) × 0.21
= $27,930]
2014 Furniture .........................................................
Cash .............................................................

Cash ................................................................
Accumulated Depreciation—Furniture........
Furniture ......................................................
Depreciation Expense ...................................
Accumulated Depreciation—Furniture .....
*[($133,000 + $27,600 – $15,000) × 0.21
= $30,576]
2015 Furniture .........................................................
Cash .............................................................
Cash ................................................................
Accumulated Depreciation—Furniture........
Furniture ......................................................
Depreciation Expense ...................................
Accumulated Depreciation—Furniture .....
*[($145,600 + $24,500 – $32,000) × 0.21
= $29,001]

35,000
35,000
8,000
19,000
27,000
27,930*
27,930

27,600
27,600
6,000
9,000
15,000

30,576*
30,576

24,500
24,500
8,000
24,000
32,000
29,001*
29,001


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11–30. (Concluded)
2. Furniture account:
Debit
Beginning balance ...............................
2013 purchases.....................................
2013 sales..............................................
2014 purchases.....................................
2014 sales..............................................
2015 purchases.....................................
2015 sales..............................................

35,000
27,000

27,600
15,000
24,500

Accumulated depreciation—furniture account:
Debit
Beginning balance ...............................
2013 sales..............................................
19,000
2013 depreciation expense..................
2014 sales..............................................
9,000
2014 depreciation expense..................
2015 sales..............................................
24,000
2015 depreciation expense..................
11–31.

1. Depreciation for 2008:
Main unit—
Component—

Credit

32,000
Credit
27,930
30,576
29,001


($71,200/10) × 9/12 = $ 5,340
1,500
($12,000/6) × 9/12 =
$ 6,840

2. Depreciation for 2014:
Main unit—
$71,200/10 = $ 7,120
Component 1—
($12,000/6) × 3/12 =
500
Component 2—
$16,500 Cost
– 4,125 Salvage value
=
2,320
$12,375/4 × 9/12
$ 9,940
3. Depreciation for 2015:
Main unit—
Component—

$71,200/10 = $ 7,120
$12,375/4 =
3,094
$10,214

Balance
$125,000
160,000

133,000
160,600
145,600
170,100
138,100
Balance
$61,000
42,000
69,930
60,930
91,506
67,506
96,507


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439

11–32.
The present value of the asset retirement obligation is computed as follows:
Business calculator keystrokes:
FV = $4,200,000; I = 8%; N = 14 years → $1,429,936
The total cost of the uranium mine is $2,229,936 = $800,000 + $1,429,936
Depletion per ton of ore: $2,229,936/1,000 tons = $2,230 per ton
1.
2.

Depreciation (or depletion) expense: $2,230 per ton × 100 tons = $223,000

Accretion expense: $1,429,936 × 0.08 = $114,395

11–33.
2012 depletion expense:
Cost of natural resources less residual value ...........
Land improvements—roads ........................................
Total cost to be depleted..............................................
Estimated tons of ore ...................................................
Depletion cost per ton—$9,975,000/3,000,000 ...........
Depletion expense—2012 (75,000 × $3.33) .................
2013 depletion expense:
2012 cost from above ...................................................
Less: 2012 depletion expense from above.................
Remaining cost to deplete at beginning of 2013 .......
Remaining tons of ore as of beginning of 2013.........
(4,500,000 estimated at year-end + 265,000
extracted during the year)
Depletion cost per ton—$9,725,250/4,765,000 ...........
Depletion expense—2013 (265,000 × $2.04) ...............
11–34.

Depreciation for the first 5 years:
$250,000/20 = $12,500 per year
$12,500 × 5 = $62,500 depreciation for first 5 years
Remaining amount to be depreciated:
$250,000 – $62,500 = $187,500
Annual rate for remaining 10 years:
$187,500/10 = $18,750
Depreciation expense in 2013 is $18,750.


$9,000,000
975,000
$9,975,000
3,000,000
$
3.33
$ 249,750
$9,975,000
249,750
$9,725,250
4,765,000

$
2.04
$ 540,600


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440

11–35.

Depreciation for the first 2 1/2 years:
$225,000 – $15,000 = $210,000/12 = $17,500 × 2 1/2 = $43,750
Book value at December 31, 2012:
$225,000 – $43,750 = $181,250
Remaining life is 5 years.
Charge for 2013: $181,250/5 = $36,250


11–36.

Depreciation for the first 2 years:
($150,000 – $30,000)/8 years = $15,000 per year
$15,000 × 2 = $30,000 for the first 2 years.
Remaining amount to be depreciated:
$150,000 – $30,000 = $120,000
Depreciation for 2012:
($120,000 – $30,000) × 6/21 = $25,714

11–37.

1. Annual depreciation for the building has been $78,000 [($2,600,000 –
$260,000)/30 years]. The current book value of the building is computed
as follows:
Original cost .............................................................
Accumulated depreciation ($78,000 × 10 years) ...
Book value ................................................................

$2,600,000
780,000
$1,820,000

The book value of $1,820,000 is compared to the $1,500,000 ($100,000 × 15
years) undiscounted sum of future cash flows to determine whether the
building is impaired. The sum of future cash flows is less, so an impairment loss should be recognized.
2. The impairment loss is equal to the $1,060,000 ($1,820,000 – $760,000) difference between the book value of the building and its fair value. The impairment loss would be recorded as follows:
Accumulated Depreciation—Building.....................
Loss on Impairment of Building ..............................

Building ($2,600,000 – $760,000) .........................

780,000
1,060,000
1,840,000

3. The answer to (1) is unaffected by the fair value of the asset. The existence of an impairment loss is determined solely using the undiscounted
sum of estimated future cash flows, not the fair value of the asset.


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11–38.

441

1. Annual depreciation for the building has been 78,000 [($2,600,000 –
$260,000)/30 years]. The current book value of the building is computed
as follows:
Original cost.................................................................
Accumulated depreciation ($78,000 × 10 years).......
Book value....................................................................

$2,600,000
780,000
$1,820,000

According to IAS 36, the existence of impairment is determined by comparing the book value of $1,820,000 to the fair value of $760,000. The fair
value is lower, so an impairment loss should be recognized. In this case,

the determination of whether an impairment loss exists is based on a
comparison of book value and fair value; under U.S. GAAP, the test is
based on a comparison of book value and the undiscounted sum of future cash flows.
2. The impairment loss is equal to the $1,060,000 ($1,820,000 − $760,000) difference between the book value of the building and its fair value. The impairment loss would be recorded as follows:
Accumulated Depreciation—Building.....................
Loss on Impairment of Building ..............................
Building ($2,600,000 – $760,000) .........................
3.

780,000
1,060,000

Because the fair value of $2,500,000 is greater than the book value of
$1,820,000, Della Bee will recognize $680,000 ($2,500,000 – $1,820,000) as
an upward asset revaluation. The upward revaluation is recorded as follows:
Accumulated Depreciation—Building.....................
Revaluation Equity Reserve ................................
Building ($2,600,000 – $2,500,000) ......................

11–39.

1.

1,840,000

2008
Jan. 1 Patents.............................................................
Cash.............................................................
2010
Jan. 1 Patents.............................................................

Cash.............................................................
2013
Jan. 1 Patents.............................................................
Cash.............................................................

780,000
680,000
100,000

31,195
31,195
9,350
9,350
32,400
32,400


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442

11–39. (Concluded)
2.

2008
Dec. 31 Amortization Expense ($31,195 × 1/16) ........
Accumulated Amortization―Patents .......
2010
Dec. 31 Amortization Expense....................................

Accumulated Amortization—Patents .......
*($31,195 × 1/16) + ($9,350 × 1/14) = $2,618 or
$36,645 × 1/14 = $2,618
2013
Dec. 31 Amortization Expense....................................
Accumulated Amortization―Patents .......
*($31,195 × 1/16) + ($9,350 × 1/14) + ($32,400
× 1/11) = $5,563 or $61,191 × 1/11 = $5,563

1,950
1,950
2,618*
2,618

5,563*
5,563

11–40.
1. December 31, 2013
Amortization Expense ($300,000/10 years).................
Accumulated Amortization .....................................

30,000
30,000

With intangible assets, the presumption is that in the absence of strong
evidence to the contrary, the residual value is zero and the straight-line
method should be used.
January 1, 2014
Impairment test:

Book value: $300,000 – $30,000 = $270,000
Undiscounted future cash flows = $25,000 × 9 years = $225,000
Because the undiscounted future cash flows are less than the book value
($225,000 < $270,000), the asset is impaired. The asset should be written
down to its fair value.
Estimated fair value:
Business calculator keystrokes:
PMT = $25,000; I = 5%; N = 9 years → $177,696
Impairment Loss ($270,000 – $177,696)............................
Accumulated Amortization ................................................
Intangible Asset ($300,000 – $177,696) .......................

92,304
30,000
122,304


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11–40. (Concluded)
2. December 31, 2013
The useful life is indefinite, so no amortization expense is recognized.
January 1, 2014
Impairment test:
Book value: $300,000
Estimated fair value of an infinite annuity:
$25,000/0.05 → $500,000

Because the estimated fair value is higher than the book value ($500,000
> $300,000), the asset is not impaired. No journal entry is necessary.
11–41.
Estimated fair value of the Production reporting unit:
Revenues $13,000 × 1.60 = $20,800 estimated fair value
Net book value of the assets and liabilities of the Production reporting unit:
Assets ($21,300 + $10,000) – Liabilities ($7,600) = $23,700
Because the estimated fair value of the reporting unit ($20,800) is less than
the net book value of the reporting unit ($23,700), further computations are
needed to determine the amount of a goodwill impairment loss, if any.
Implied fair value of goodwill as of December 31:
Estimated fair value of Production reporting unit............
Fair value of identifiable assets – fair value of liabilities
($20,500 – $7,600)...........................................................
Implied fair value of goodwill .............................................

$20,800
12,900
$ 7,900

Journal entry necessary to recognize the goodwill impairment loss:
Goodwill Impairment Loss .................................................
Goodwill ($10,000 – $7,900)..........................................

2,100
2,100

In addition to the goodwill impairment, the fact that the fair value of the identifiable assets is less than the book value of those assets suggests that there
may be other impaired assets.



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444

11–42.

2013
Dec. 31 Cash ..........................................................................
Notes Receivable .....................................................
Accumulated Depreciation—Equipment ...............
Equipment...........................................................
Discount on Notes Receivable .........................
Gain on Sale of Equipment ...............................

3,000
12,000
75,000
84,000
1,300*
4,700†

*Discount on notes receivable:
Present value of an ordinary annuity of $1 for 2
periods at 8% (from Table IV of the Time Value
of Money module) = 1.7833
1.7833 × $6,000 = $10,700 present value of note
$12,000 face value of note – $10,700 present
value = $1,300 discount

Using business calculator keystrokes:
PMT = $6,000, N = 2, I = 8% → PV = $10,700
†

Gain on sale of equipment:
Down payment...........................................................
Present value of note receivable .............................
Selling price (present value) of equipment ............
Less: Book value of equipment...............................
Gain on sale of equipment .......................................

$ 3,000
10,700
$ 13,700
9,000
$ 4,700

2014
Dec. 31 Cash ..........................................................................
6,000
Discount on Notes Receivable ...............................
856
Notes Receivable ...............................................
6,000
Interest Revenue ($10,700 × 0.08).....................
856
2015
Dec. 31 Cash ..........................................................................
6,000
Discount on Notes Receivable ...............................

444
Notes Receivable ...............................................
6,000
Interest Revenue ................................................
444*
*Interest revenue 2015:
$1,300 – $856 = $444 unamortized discount at Dec. 31, 2015
Interest revenue for 2015 can also be computed as follows:
$10,700 – $6,000 payment in 2014 + $856 discount amortized in
2014 = $5,556; $5,556 × 0.08 = $444 (rounded)


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445

11–43.
1. Machine—Held for Sale ($10,000 – $1,000) .........................
Loss on Held-for-Sale Classification ...................................
Accumulated Depreciation—Machine .................................
Machine .............................................................................

9,000
16,000
75,000
100,000

2. No depreciation expense is recognized on assets classified as held for
sale.

3. Machine Held for Sale ...........................................................
Gain on Recovery of Value—Held for Sale....................

4,400
4,400

Computation of gain: ($15,000 – $1,600) – $9,000 = $4,400
The maximum gain that can be recognized is the amount of the initial loss
recognized upon classification as held for sale = $16,000. In this case, the
entire increase can be recognized.
11–44. (a) The truck should be valued at $40,000 because in a nonmonetary exchange
not involving similar assets, the new asset should be recorded at the fair
value of the asset surrendered, if determinable. List price is not necessarily
the same as fair value.
(b) The new machine should be valued at $35,000, the book value of the old
machine. Because this exchange was for similar productive assets with a
company in the same line of business with no cash involved, the indicated
gain would be deferred. This treatment is consistent with the FASB’s assertion that the exchange has no commercial substance.
(c) The new machine should be valued at $55,000 ($40,000 + $15,000). Because
the exchange involves cash that is considered a “large” amount (25% or
greater of the transaction amount), it is a monetary transaction, and the asset is recorded at the fair value of the old machine plus the cash paid. A
gain of $5,000 would be recognized by Coaltown. The list price of $62,000 is
not used because it does not represent fair value.
(d) On Coaltown’s books, the new machine should be valued at $38,000
($35,000 + $3,000). Because the exchange is made with a company in the
same line of business and involves similar assets and cash paid is considered a “small” amount (less than 25% of the transaction amount), there is
no culmination of the earnings process. The asset is thus recorded at the
book value of the old machine plus the cash paid.



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446

11–44. (Concluded)
Coaltown Corporation
Machinery (new)...................................................................
38,000
Accumulated Depreciation—Machinery ............................
17,000
Machinery (old) ................................................................
52,000
Cash ..................................................................................
3,000
To record exchange of old machinery costing $52,000 with
accumulated depreciation of $17,000 for new machinery
recorded at $38,000, the carrying value of the old machinery
plus cash paid.
Newton Inc.
Machinery (new) ............................................................
Accumulated Depreciation—Machinery .....................
Cash .............................................................................
Machinery (old)..........................................................
Gain on Exchange of Machinery .............................
To record exchange of old machinery
costing $55,000 with accumulated depreciation of $42,000 for new machinery
(fair value, $40,000) and $3,000 cash.
New machinery recorded at $12,093, or
$13,000 – $3,000 + $2,093.


12,093
42,000
3,000
55,000
2,093*

*Indicated gain: $43,000 – $13,000 = $30,000
$3,000
Recognized gain:
× $30,000 = $2,093
$3,000 + $40,000
11–45.

1. Truck (new) .....................................................................
Accumulated Depreciation—Truck ..............................
Loss on Trade-ln of Truck.............................................
Truck (old).................................................................
Cash...........................................................................
*Book value of trade-in...................................... $3,750
Less: Amount allowed on trade-in
($23,100 – $20,900) ........................................... 2,200
Loss recognized on trade-in............................ $1,550

23,100
19,000
1,550*
22,750
20,900



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11–45. (Concluded)
2. Truck (new) .....................................................................
Accumulated Depreciation—Truck ..............................
Truck (old).................................................................
Cash...........................................................................
Gain on Trade-ln of Truck........................................

23,100
19,000
22,750
18,000
1,350*

*Amount allowed on trade-in
($23,100 – $18,000) ........................................... $5,100
Less: Book value of trade-in ........................... 3,750
Gain recognized on trade-in ............................ $1,350
(Note: Because the exchange involved a “large” amount of cash, the exchange is considered to have commercial substance and the gain is recognized.)
‡

11–46.

1. Double-declining-balance depreciation:
($180,000 × 0.20* × 4/12) = $12,000

*1/10 = 0.10; 0.10 × 2 = 0.20
2. Sum-of-the-years’-digits depreciation:
Depreciation for full year [($180,000 – $18,000) × 10/55*] = $29,455
Four months of depreciation ($29,455 × 4/12) = $9,818
*[(10 + 1) × 10]/2 = 55
3. Productive-output depreciation:
($180,000 – $18,000)/750,000 units = $0.22* per unit
21,000 units × $0.22* per unit = $4,620
*Rounded
4. Service-hours depreciation:
($180,000 – $18,000)/36,000 hours = $4.50 per hour
1,500 hours × $4.50 per hour = $6,750
The double-declining-balance method gives the highest depreciation expense for 2013, $12,000.

‡

Relates to Expanded Material.


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448

‡

11–47.

1. (a)


Double-declining-balance method:
2012: $110,000 × 0.167* × 6/12 = $ 9,185
= $16,836
2013: $100,815 × 0.167
*1/12 = 0.0833; 0.0833 × 2 = 0.167

(b)

Sum-of-the-years’-digits (SYD) method:
$110,000 – $17,000 = $93,000 depreciable base
[(12 + 1)/2] × 12 = 78—SYD fraction denominator
12/78 × $93,000 = $14,308 × 6/12 = $ 7,154
11/78 × 93,000 = 13,115 × 6/12 =
6,558
Total for 2013 = $13,712
2. 2012: $110,000 × 0.25* × 6/12 = $13,750
= $24,063
2013: $96,250 × 0.25
*1/8 = 0.125 × 2 = 0.25, or 25%
‡

11–48.

Year
2013
2014
2015
2016
2017
2018

2019
2020

Depreciation Schedule
Cost
Computation
Recovery Amount
($29,200 × 0.2857 × 6/12)
($25,029 × 0.2857)
($17,878 × 0.2857)
($12,770 × 0.2857)
($9,122 × 0.2857)
($6,516/2.5)*
($3,910/1.5)

$4,171
7,151
5,108
3,648
2,606
2,606
2,607
1,303

Asset
Book Value
$29,200
25,029
17,878
12,770

9,122
6,516
3,910
1,303
0

*Switched to straight-line depreciation because depreciation of
$2,606 exceeds the double-declining-balance depreciation of
$1,862 ($6,516 × 0.2857)

‡

Relates to Expanded Material.


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449

PROBLEMS
11–49.
(a) Straight-line method:
End of
Year
Depreciation
2013
2014
2015


Accumulated
Depreciation

$20,000
20,000
20,000
$60,000

$20,000
40,000
60,000

(b) Sum-of-the-years’-digits method:
End of
Year
Depreciation
2013
2014
2015

(3/6 × $60,000) =
(2/6 × 60,000) =
(1/6 × 60,000) =

Accumulated
Depreciation
$ 30,000
20,000
10,000
$60,000


(c) Double-declining-balance method:
End of
Year
Depreciation
2013
2014
2015

(66.7%* × $80,000) = $ 53,360
6,640†
0‡
$ 60,000

$ 30,000
50,000
60,000

Accumulated
Depreciation
$53,360
60,000
60,000

Asset
Book Value
$80,000
60,000
40,000
20,000


Asset
Book Value
$80,000
50,000
30,000
20,000

Asset
Book Value
$80,000
26,640
20,000
20,000

*Straight-line rate = 33 1/3%; 2.0 × 0.333 = 66.7%.
†
Double-declining-balance depreciation of $17,769 ($26,640 × 0.667)
would cause asset book value to fall below residual value ($20,000).
Therefore, depreciate the $6,640 difference between the book value
and residual value.
‡
No additional depreciation because asset book value equals the
residual value of $20,000.
11–50.

Cost of tractor and front-end loader:
Tractor..............................................
Front-end loader .............................
Shipping...........................................

Installation .......................................
Total cost ......................................

$100,000
7,000
600
800
$108,400