PRACTICE 11–1 RECORDING DEPRECIATION EXPENSE

Depreciation Expense............................................................................... 1,000

Accumulated Depreciation................................................................. 1,000

PRACTICE 11–2 COMPUTING STRAIGHT-LINE DEPRECIATION

1. ($115,000 – $20,000)/5 years = $19,000 annual depreciation expense

2. Depreciation Expense........................................................................ 19,000

Accumulated Depreciation.......................................................... 19,000

3. Book value: $115,000 – $19,000 = $96,000

PRACTICE 11–3 COMPUTING SUM-OF-THE-YEARS’-DIGITS DEPRECIATION

1. and 2.
Depreciation Accumulated Book
Year Computation Amount Depreciation Value
1 ($115,000 – $20,000)  (5/15) $31,667 $31,667 $83,333
2 ($115,000 – $20,000)  (4/15) 25,333 57,000 58,000
3 ($115,000 – $20,000)  (3/15) 19,000 76,000 39,000
4 ($115,000 – $20,000)  (2/15) 12,667 88,667 26,333
5 ($115,000 – $20,000)  (1/15) 6,333 95,000 20,000

PRACTICE 11–4 COMPUTING DOUBLE-DECLINING-BALANCE DEPRECIATION

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

Depreciation Accumulated Book

Year Computation Amount Depreciation Value
1 $100,000  0.50 $50,000 $50,000 $50,000
2 $50,000  0.50 25,000 75,000 25,000
3 $25,000  0.50 12,500 87,500 12,500
4 $12,500 – $10,000 2,500 90,000 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.
2 Chapter 11

PRACTICE 11–5 COMPUTING SERVICE-HOURS DEPRECIATION

1. and 2.

Rate per service hour: [($75,000 – $15,000)/20,000 hours] = $3 per hour

Depreciation Accumulated Book

Year Computation Amount Depreciation Value
1 9,000 hours  $3 per hour $27,000 $27,000 $48,000
2 5,000 hours  $3 per hour 15,000 42,000 33,000
3 4,000 hours  $3 per hour 12,000 54,000 21,000
4 2,000 hours  $3 per hour 6,000 60,000 15,000

PRACTICE 11–6 COMPUTING PRODUCTIVE-OUTPUT DEPRECIATION

1. and 2.

Rate per unit: [($70,000 – $5,000)/13,000 units)] = $5 per unit

Depreciation Accumulated Book

Year Computation Amount Depreciation Value
1 3,000 units  $5 per unit $15,000 $15,000 $55,000
2 5,000 units  $5 per unit 25,000 40,000 30,000
3 2,000 units  $5 per unit 10,000 50,000 20,000
4 3,000 units  $5 per unit 15,000 65,000 5,000

PRACTICE 11–9 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 11–10 COMPUTING DEPLETION EXPENSE

1. 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............................................................................. 14,400

Accumulated Depletion (or Mine)............................................... 14,400

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
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 CHANGE IN ESTIMATED UNITS OF PRODUCTION

1. 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 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) $910,000
Book value ($1,500,000 – $600,000) 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
4 Chapter 11

not used. Therefore, the equipment should continue to be reported in the company’s
books at its net book value of $900,000.
PRACTICE 11–15 RECORDING A TANGIBLE ASSET IMPAIRMENT

1. 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) $600,000
Book value ($750,000 – $125,000) 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 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....................................................................... 62,500

Accumulated Amortization.......................................................... 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 11–19 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 11–21 EXCHANGE OF ASSETS

1. New Asset........................................................................................... 150

Accumulated Depreciation (old asset)............................................. 850
Old Asset....................................................................................... 1,000
6 Chapter 11

PRACTICE 11–21 (Concluded)

2. Cash.................................................................................................... 300
New Asset........................................................................................... 100
Accumulated Depreciation (old asset)............................................. 850
Gain on Exchange ($400 – $150 book value)............................. 250
Old Asset....................................................................................... 1,000

3. Cash.................................................................................................... 80
New Asset........................................................................................... 70
Accumulated Depreciation (old asset)............................................. 850
Old Asset....................................................................................... 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

11–32.

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. Depreciation (or depletion) expense: $2,230 per ton  100 tons = $223,000
2. Accretion expense: $1,429,936  0.08 = $114,395

11–33.

2010 depletion expense:

Cost of natural resources less residual value............ $9,000,000
Land improvements—roads......................................... 975,000
Total cost to be depleted.............................................. $ 9,975,000
Estimated tons of ore................................................... 3,000,000
Depletion cost per ton—$9,975,000/3,000,000............ $ 3.33
Depletion expense—2010 (75,000  $3.33)................. $ 249,750
2011 depletion expense:
2010 cost from above................................................... $9,975,000
Less: 2010 depletion expense from above................. 249,750
Remaining cost to deplete at beginning of 2011........ $ 9,725,250
Remaining tons of ore as of beginning of 2011......... 4,765,000
(4,500,000 estimated at year-end + 265,000
 extracted during the year)
Depletion cost per ton—$9,725,250/4,765,000............ $ 2.04
Depletion expense—2011 (265,000  $2.04)............... $ 540,600

11–34. 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.

11–37. 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.............................................................. $1,300,000
Accumulated depreciation ($39,000  10 years).... 390,000
Book value................................................................. $ 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 Depreciation—Building..................... 390,000
Loss on Impairment of Building.............................. 530,000
Building ($1,300,000 – $380,000)......................... 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.
8 Chapter 11

11–38. 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................................................................. $1,300,000
Accumulated depreciation ($39,000  10 years)....... 390,000
Book value.................................................................... $ 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 Depreciation—Building..................... 390,000
Loss on Impairment of Building.............................. 530,000
Building ($1,300,000 – $380,000)......................... 920,000

3. 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 Depreciation—Building..................... 390,000
Revaluation Equity Reserve................................ 340,000
Building ($1,300,000 – $1,250,000)...................... 50,000

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 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
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,
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.
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)................................................................... 10,000
Accumulated Depreciation—Machinery............................ 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.