After completing this chapter you should be able to: Explain the concept of depreciation, identify the factors involved in the depreciation process, compare activity, straight-line, and decreasing-charge methods of depreciation, explain special depreciation methods... and other contents.
Chapter 11-1 CHAPTER 11 DEPRECIATION, IMPAIRMENTS, AND DEPLETION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 11-2 Learning Objectives Learning Objectives 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 11-3 Depreciation, Impairments, and Depletion Depreciation, Impairments, and Depletion Depreciation Impairments Depletion Factors involved Methods of depreciation Special methods Recognizing impairments Measuring Impairments Restoration of loss Assets to be disposed of Establishing a base Write-off of resource cost Estimating reserves Liquidating dividends Continuing controversy Special issues Chapter 11-4 Presentation and Analysis Presentation Analysis 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 11-5 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: Chapter 11-6 (1) What depreciable base is to be used? (2) What is the asset’s useful life? (3) What method of cost allocation is best? LO 2 Identify the factors involved in the depreciation process Depreciation Method of Cost Allocation Depreciation Method of Cost Allocation Factors Involved in the Depreciation Process Depreciable Base Illustration 111 Chapter 11-7 LO 2 Identify the factors involved in the depreciation process Depreciation Method of Cost Allocation Depreciation Method of Cost Allocation Factors Involved in the Depreciation Process Estimation of Service Lifes Service life of an asset often differs from its physical life Companies retire assets for two reasons: physical factors (such as casualty or expiration of physical life) and economic factors (obsolescence) Chapter 11-8 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: Chapter 11-9 (1) Activity method (units of use or production) (2) Straightline method. (3) Sumoftheyears’digits (4) Decliningbalance method (5) Group and composite methods (6) Hybrid or combination methods Accelerated methods Special methods LO 3 Compare activity, straightline, and decreasingcharge methods of depreciation Depreciation Method of Cost Allocation Depreciation Method of Cost Allocation Activity Method Illustration 112 Stanley Coal Mines Facts Illustration: If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is: Illustration 113 Chapter 11-10 LO 3 Compare activity, straightline, and decreasingcharge methods of depreciation Presentation and Analysis Presentation and Analysis The assets turnover is a measure of a firm’s ability to generate sales from a The particular investment in assets. Illustration 1120 Chapter 11-43 Solution on notes page LO 7 Explain how to report and analyze property, plant, equipment, and natural resources Presentation and Analysis Presentation and Analysis The profit margin on sales is a measure of the ability to generate operating The income from a particular level of sales Illustration 1121 Chapter 11-44 Solution on notes page LO 7 Explain how to report and analyze property, plant, equipment, and natural resources Presentation and Analysis Presentation and Analysis Rate of Return on Assets measures a firm’s success in using assets to generate earnings Illustration 1122 Chapter 11-45 Solution on notes page LO 7 Explain how to report and analyze property, plant, equipment, and natural resources Presentation and Analysis Presentation and Analysis The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows: Rate of Return on Assets Net Income Average Total Assets Chapter 11-46 = = Profit Margin on Sales Net Income Net Sales x x Asset Turnover Net Sales Average Total Assets LO 7 Explain how to report and analyze property, plant, equipment, and natural resources Presentation and Analysis Presentation and Analysis The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows: Rate of Return on Assets $64.2 = = ($811.8 + 665.3) / 2 8.7% Chapter 11-47 Profit Margin on Sales $64.2 x x 15.28% $420.1 ($811.8 + 665.3) / 2 $420.1 = Asset Turnover x 569 LO 7 Explain how to report and analyze property, plant, equipment, and natural resources Under both iGAAP and U.S. GAAP, interest costs incurred during construction must be capitalized iGAAP, like U.S. GAAP, capitalizes all direct costs in selfconstructed assets. The accounting for exchanges of nonmonetary assets has recently converged between iGAAP and U.S. GAAP. iGAAP permits the same depreciation methods (straightline, accelerated, unitsof production) as U.S. GAAP Chapter 11-48 As discussed in the Chapter 4 Convergence Corner, iGAAP permits asset revaluations (which are not permitted in U.S. GAAP). Consequently, companies that use the revaluation framework must follow revaluation depreciation procedures. iGAAP also uses a fair value test to measure the impairment loss. However, iGAAP does not use the firststage recoverability test used under U.S. GAAP—comparing the undiscounted cash flows to the carrying amount. Thus, the iGAAP test is more strict than U.S. GAAP Chapter 11-49 Modified Accelerated Cost Recovery System MACRS differs from GAAP in three respects: a mandated tax life, which is generally shorter than the economic life; cost recovery on an accelerated basis; and an assigned salvage value of zero Chapter 11-50 LO 8 Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Tax Lives (Recovery Periods) Chapter 11-51 Illustration 11A1 LO 8 Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Tax Depreciation Methods Illustration 11A2 Chapter 11-52 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 11-53 LO 8 Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Illustration: Chapter 11-54 Illustration 11A3 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 11A4 Illustration 11A5 Chapter 11-55 LO 8 Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Additional Issues Optional straightline method Tax versus book depreciation Chapter 11-56 LO 8 Describe income tax methods of depreciation Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc. 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Explain how to report? ?and? ?analyze property, plant, equipment,? ?and? ?natural resources Chapter 1 1-3 Depreciation,? ?Impairments,? ?and? ?Depletion Depreciation,? ?Impairments,? ?and? ?Depletion Depreciation Impairments Depletion. . .CHAPTER 11 DEPRECIATION, IMPAIRMENTS, AND DEPLETION Intermediate? ?Accounting 13th Edition Kieso, Weygandt,? ?and? ?Warfield Chapter 1 1-2 Learning Objectives Learning Objectives... Units extracted x Cost per unit Chapter 1 1-3 5 = ? ?Depletion? ?cost per unit = ? ?Depletion LO 6 Explain the? ?accounting? ?procedures for? ?depletion? ?of natural resources Depletion Depletion E1119 (Depletion? ?Computations—Timber): Hernandez Timber Company owns