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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
1. and 2.
Double-declining-balance percentage: (100%/4 years) 2 = 50%
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
1. and 2.
1. and 2.
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.
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
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.
11–33.
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.
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.
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
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.