Professional Documents
Culture Documents
11
Chapter 11-1
Chapter 11-2
Chapter 11-3
Chapter 11-4
physical life.
Companies retire assets for two reasons: physical factors (such as casualty or
(2) Straight-line method. (3) Sum-of-the-years-digits. (4) Declining-balance method. (5) Group and composite methods. (6) Hybrid or combination methods.
Chapter 11-6
Accelerated methods
Special methods
Chapter 11-7
Chapter 11-8
Sum-of-the-Years-Digits. Each fraction uses the sum of the years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator is the number of years of estimated life remaining as of the beginning of the year.
Chapter 11-9
Chapter 11-10
Chapter 11-12
10,500 10,500
Depreciation - Metho
Activity Metho
(Given) Hours Use 800 x x x x x 800 Journal entry: 2010 Depreciation expense Accumultate
Chapter 11-15
of Cost Allocation
LO 3
5 12 = 416667 7 12 = 583333
Current Year xpense 17 500 38 500 30 100 21 700 13 300 4 900 126 000 Accum Deprec 17 500 56 000 86 100 107 800 121 100 126 000
4 58 15 = 3 58 15 = 2 58 15 = 1 58 15 = 58 15 =
17 500 17 500
LO 3
ournal entr 0 0
Chapter 11-17
,000 ,000
LO
Chapter 11-20
No Entry Required
Change in
stimate
a ple
After 7 years
Equipment cost Salvage value Depreciable base Useful life (original) Annual depreciation
$510,000 First, establish - 10,000 NBV at date of change in estimate. 500,000 10 years $ 50,000 x 7 years = $350,000
Balance Sheet (Dec. 31, 2009) Fixed Assets: Equipment Accumulated depreciation Net book value (NBV)
Chapter 11-22
Change in
stimate
a ple
$160,000 5,000 155,000 8 years $ 19,375
After 7 years
Depreciation Expense calculation for 2010.
Net book value Salvage value (new) Depreciable base Useful life remaining Annual depreciation
19,375 19,375
Impairments
When the carrying amount of an asset is not recoverable, a company records a write-off referred to as an impairment.
Events leading to an impairment:
a. c. Decrease in the market value of an asset. Adverse change in legal factors or in the business climate. b. Change in the manner in which an asset is used. d. An accumulation of costs in excess of the amount originally expected to acquire or construct an asset. e. A projection or forecast that demonstrates continuing losses associated with an asset.
Chapter 11-24
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 long-lived 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 11-25
Im a m
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.
t cc m lat d d ct d t Fa val 9 c at t ca t dat l w
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 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 11-26
Impairments
(a).
st mulated depre iati n Carr in amount air value Loss on impairment 00 000 000 000 000 000
3,600,000 3,600,000
Impairments
(b). Net arr in am nt Usef l life epre iati n per 12/31/11 Depreciation expense Accumulated depreciation 1,100,000 1,100,000 ear ears
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 11-29
Depletion
Estab ishing 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 11-30
Depletion
Write-off of Resource Cost
Normally, companies compute depletion on a units-ofproduction 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 11-31
Depletion
E11-1 (Depletion ComputationsTimber): Hernandez Timber Company owns 9,000 acres of timberland purchased in 1999 at a cost of $1,400 per acre. At the time of purchase the land without the timber was valued at $400 per acre. In 2000, Hernandez built fire lanes and roads, with a life of 30 years, at a cost of $87,000. Every year Hernandez sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2001, Hernandez selectively logged and sold 700,000 board feet of timber, of the estimated 3,000,000 board feet. In 2002, Hernandez planted new seedlings to replace the trees cut at a cost of $100,000. Instructions: Determine the depreciation expense and the cost of timber sold related to depletion for 2001.
Chapter 11-32
Depletion
E11-1 (Depletion ComputationsTimber)
Depreciation Expense:
Fire lanes and roads seful life Depreciation expense per year $ 87,000 30 $ 2,900
Chapter 11-33
Depletion
E11-1 (Depletion ComputationsTimber)
Depletion:
Cost of timberland per acre Cost of land per acre Cost of timber only per acre Total acres Value of timber Estimated total board feet Cost per board foot Board feet of timber sold Cost of timber sold related to depletion
Chapter 11-34
$ $ $ $ $
Dep etion
Estimating Recoverab e Reserves
Same as accounting for changes in estimates. Revise the depletion rate on a prospective basis. Divides the remaining cost by the new estimate of the
recoverable reserves.
Chapter 11-35
Depletion
Liquidating Dividends Dividends greater than the amount of accumulated net income.
Illustration: Callahan Mining had a retained earnings balance of $1,650,000 and paid-in capital in excess of par of $5,435,493. Callahans board declared a dividend of $3 a share on the 1,000,000 shares outstanding. It records the $3,000,000 cash dividend as follows. Retained Earnings Paid-in Capital in Excess of Par Cash
Chapter 11-36
Depletion
Continuing Controversy
Oil and Gas Industry:
Full cost concept Successful efforts concept
Chapter 11-37
Disclosures
Chapter 11-38
Chapter 11-39
Chapter 11-40
Chapter 11-41
Chapter 11-42
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