PRACTICE 111

RECORDING DEPRECIATION EXPENSE

Depreciation Expense...............................................................................
Accumulated Depreciation.................................................................
PRACTICE 112

1,000
1,000

COMPUTING STRAIGHT-LINE DEPRECIATION

1.

($115,000 $20,000)/5 years = $19,000 annual depreciation expense

2.

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

3.

19,000
19,000

Book value: $115,000 $19,000 = $96,000

PRACTICE 113

COMPUTING SUM-OF-THE-YEARS-DIGITS DEPRECIATION

1. and 2.
Year
1
2
3
4
5

Computation
($115,000 $20,000)
($115,000 $20,000)
($115,000 $20,000)
($115,000 $20,000)
($115,000 $20,000)

PRACTICE 114

(5/15)
(4/15)
(3/15)
(2/15)
(1/15)

Depreciation
Amount

Accumulated
Depreciation

Book
Value

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

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

$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

Computation

Depreciation
Amount

Accumulated
Depreciation

Book
Value

1
2
3
4

$100,000 0.50
$50,000 0.50
$25,000 0.50
$12,500 $10,000

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

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

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

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

Chapter 11

PRACTICE 115

COMPUTING SERVICE-HOURS DEPRECIATION

1. and 2.
Rate per service hour: [($75,000 $15,000)/20,000 hours] = $3 per hour
Year

Computation
9,000 hours
5,000 hours
4,000 hours
2,000 hours

1
2
3
4

PRACTICE 116

$3 per hour
$3 per hour
$3 per hour
$3 per hour

Depreciation
Amount

Accumulated
Depreciation

Book
Value

$27,000
15,000
12,000
6,000

$27,000
42,000
54,000
60,000

$48,000
33,000
21,000
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
5,000 units
2,000 units
3,000 units

PRACTICE 119

$5 per unit
$5 per unit
$5 per unit
$5 per unit

Depreciation
Amount

Accumulated
Depreciation

Book
Value

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

$15,000
40,000
50,000
65,000

$55,000
30,000
20,000
5,000

ASSET RETIREMENT OBLIGATION

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

FV = $250,000; I = 9%; N = 12 years $88,884
The total cost of the landfill site is $613,884 = $525,000 + $88,884
Depreciation expense: $613,884/12 years = $51,157
Accretion expense: $88,884 0.09 = $8,000
PRACTICE 1110
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 1111

CHANGE IN ESTIMATED LIFE

14,400
14,400

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
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 1112
1.

CHANGE IN ESTIMATED UNITS OF PRODUCTION

Depletion rate for Year 1 = January 1 cost/January 1 tons

$150,000/2,000 tons = $75.00 per ton
900 tons $75.00 per ton = $67,500 depletion expense

2.

Depletion rate for Year 2 = January 1 cost/January 1 tons

($150,000 $67,500 + $60,000)/(600 tons + 700 tons) = $109.62 per ton
600 tons $109.62 per ton = $65,772

PRACTICE 1113

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 1114

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

Chapter 11

not used. Therefore, the equipment should continue to be reported in the companys
books at its net book value of $900,000.

PRACTICE 1115
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 ($20,000 30 years)
Book value ($750,000 $125,000)

$600,000
625,000

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

Accumulated Depreciation................................................................ 125,000

Loss on Impairment ($625,000 $300,000)...................................... 325,000
Building.........................................................................................
450,000

PRACTICE 1116

RECORDING UPWARD ASSET REVALUATIONS

Building ($730,000 $500,000)......................................................... 230,000

Accumulated Depreciation................................................................ 40,000
Revaluation Equity Reserve........................................................
270,000
PRACTICE 1117

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 1119

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 1121
1.

EXCHANGE OF ASSETS

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

150
850
1,000

Chapter 11

PRACTICE 1121
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).............................................
Old Asset.......................................................................................

80
70
850

250
1,000

1,000

Market value of old asset = $400

Implied gain on exchange of old asset = $400 $150 book value = $250 implied
gain
Market value of new asset = $320 ($400 less $80 in cash)
Asset value $320 less implied gain of $250 = $70
1132.
The present value of the asset retirement obligation is computed as
follows:
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

1133.
2010 depletion expense:
Cost of natural resources less residual value............
Land improvementsroads.........................................
Total cost to be depleted..............................................
Estimated tons of ore...................................................
Depletion cost per ton$9,975,000/3,000,000............
Depletion expense2010 (75,000 $3.33)................
2011 depletion expense:
2010 cost from above...................................................
Less: 2010 depletion expense from above.................
Remaining cost to deplete at beginning of 2011........
Remaining tons of ore as of beginning of 2011.........
(4,500,000 estimated at year-end + 265,000

$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

extracted during the year)

Depletion cost per ton$9,725,250/4,765,000............
Depletion expense2011 (265,000 $2.04)..............
1134.

$
2.04
$ 540,600

Depreciation for the first 5 years:

$500,000/20 = $25,000 per year
$25,000 5 = $125,000 depreciation for first 5 years
Remaining amount to be depreciated:
$500,000 $125,000 = $375,000
Annual rate for remaining 10 years:
$375,000/10 = $37,500
Depreciation expense in 2011 is $37,500.

1137.

1. Annual depreciation for the building has been $39,000 [($1,300,000

$130,000)/30 years]. The current book value of the building is computed
as follows:
Original cost..............................................................
Accumulated depreciation ($39,000 10 years)...
Book value.................................................................

$1,300,000
390,000
$ 910,000

The book value of $910,000 is compared to the $750,000 ($50,000 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 $530,000 ($910,000 $380,000)
difference between the book value of the building and its fair value. The
impairment loss would be recorded as follows:
Accumulated DepreciationBuilding.....................
Loss on Impairment of Building..............................
Building ($1,300,000 $380,000).........................

390,000
530,000
920,000

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.

1138.

Chapter 11

1. Annual depreciation for the building has been $39,000 [($1,300,000

$130,000)/30 years]. The current book value of the building is computed
as follows:
Original cost.................................................................
Accumulated depreciation ($39,000 10 years)......
Book value....................................................................

$1,300,000
390,000
$ 910,000

According to IAS 36, the existence of impairment is determined by

comparing the book value of $910,000 to the fair value of $380,000. 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 $530,000 ($910,000 $380,000)
difference between the book value of the building and its fair value. The
impairment loss would be recorded as follows:
Accumulated DepreciationBuilding.....................
Loss on Impairment of Building..............................
Building ($1,300,000 $380,000).........................
3.

390,000
530,000
920,000

Because the fair value of $1,250,000 is greater than the book value of
$910,000, Della Bee will recognize $340,000 ($1,250,000 $910,000) as
an upward asset revaluation. The upward revaluation is recorded as
follows:
Accumulated DepreciationBuilding.....................
Revaluation Equity Reserve................................
Building ($1,300,000 $1,250,000)......................

390,000
340,000
50,000

1144. (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 market value of the asset surrendered, if determinable. List
price is not necessarily the same as market 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
FASBs 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,
it is a monetary transaction, and the asset is recorded at the market 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 market value.

(d) 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 is considered a small
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.
1144. (Concluded)
Coaltown Corporation
Machinery (new)...................................................................
38,000
Accumulated DepreciationMachinery............................
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)...................................................................
10,000
Accumulated DepreciationMachinery............................
42,000
Cash......................................................................................
3,000
Machinery (old)................................................................
55,000
To record exchange of old machinery costing $55,000 with
accumulated depreciation of $42,000 for new machinery
recorded at $10,000, the market value of the new machinery
less the amount of the deferred gain.