11sol 7e Final PDF

Chapter 11 Property, Plant, and Equipment and
Intangible Assets: Utilization and Impairment
AACSB assurance of learning standards in accounting and business education require

documentation of outcomes assessment. Although schools, departments, and faculty may approach
assessment and its documentation differently, one approach is to provide specific questions on
exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each
question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning
skills:
Questions AACSB Tags Exercises AACSB Tags

111 Reflective thinking 111 Analytic
1110 Reflective thinking 1110 Analytic, Reflective thinking
Brief Exercises AACSB Tags 1123 Analytic, Diversity
111 Reflective thinking 1124 Analytic, Diversity
112 Analytic 1125 Analytic
113 Analytic 1126 Reflective thinking
116 Analytic 1129 Communications
117 Analytic 1130 Communications
118 Reflective thinking, Analytic 1131 Analytic
119 Reflective thinking, Analytic 1132 Analytic
1113 Analytic CPA/CMA AACSB Tags
The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 11 111
CPA/CMA cont AACSB Tags Problems AACSB Tags
13 Analytic 1110 Analytic, Reflective thinking
3 Analytic

112 Intermediate Accounting, 7/e
QUESTIONS FOR REVIEW OF KEY TOPICS
Question 111
The terms depreciation, depletion, and amortization all refer to the process of allocating the
cost of property, plant, and equipment and finite-life intangible assets to periods of use. The only
difference between the terms is that they refer to different types of these long-lived assets;
depreciation for plant and equipment, depletion for natural resources, and amortization for
intangibles.
Question 112
The term depreciation often is confused with a decline in value or worth of an asset.
Depreciation is not measured as decline in value from one period to the next. Instead, it involves the
distribution of the cost of an asset, less any anticipated residual value, over the asset's estimated
useful life in a systematic and rational manner that attempts to match revenues with the use of the
asset.
Question 113
The process of cost allocation for plant and equipment and finite-life intangible assets requires
that three factors be established at the time the asset is put into use. These factors are:
1. Service (useful) lifeThe estimated use that the company expects to receive from the asset.
2. Allocation baseThe value of the usefulness that is expected to be consumed.
3. Allocation methodThe pattern in which the usefulness is expected to be consumed.
Question 114
Physical life provides the upper bound for service life. Physical life will vary according to the
purpose for which the asset is acquired and the environment in which it is operated. Service life
may be less than physical life for several reasons. For example, the expected rate of technological
changes may shorten service life. Management intent also may shorten the period of an assets
usefulness below its physical life. For instance, a company may have a policy of using its delivery
trucks for a three-year period before trading the trucks for new models.
Question 115
The total amount of depreciation to be recorded during an assets service life is called its
depreciable base. This amount is the difference between the initial value of the asset at its
acquisition (its cost) and its residual value. Residual or salvage value is the amount the company
expects to receive for the asset at the end of its service life less any anticipated disposal costs.

Answers to Questions (continued)
Question 116
Activity-based allocation methods estimate service life in terms of some measure of
productivity. Periodic depreciation or depletion is then determined based on the actual productivity
generated by the asset during the period. Time-based allocation methods estimate service life in
years. Periodic depreciation or amortization is then determined based on the passage of time.
Question 117
The straight-line depreciation method allocates an equal amount of depreciable base to each
year of an assets service life. Accelerated depreciation methods allocate higher portions of
depreciable base to the early years of the assets life and lower amounts of depreciable base to later
years. Total depreciation is the same by either approach.
Question 118
Theoretically, the use of activity-based depreciation methods would provide a better matching
of revenues and expenses. Clearly, the productivity of a plant asset is more closely associated with
the benefits provided by that asset than the mere passage of time. However, activity-based methods
quite often are either infeasible or too costly to use. For example, buildings do not have an
identifiable measure of productivity. For assets such as machinery, there may be an identifiable
measure of productivity, such as machine-hours or units produced, but it is more costly to determine
the amount each period than it is to simply measure the passage of time. For these reasons, most
companies use time-based depreciation methods.
Question 119
Companies might use the straight-line method because they consider that the benefits derived
from the majority of plant assets are realized approximately evenly over these assets useful lives. It
also is the easiest method to understand and apply. The effect on net income also could explain why
so many companies prefer the straight-line method to the accelerated methods. Straight line
produces a higher net income in the early years of an assets life. Net income can affect bonuses
paid to management or debt agreements with lenders. Income taxes are not a factor in determining
the depreciation method because a company is not required to use the same depreciation method for
both financial reporting and income tax purposes.
Question 1110
The group approach to aggregation is applied to a collection of depreciable assets that share
similar service lives and other attributes. For example, group depreciation could be used for fleets of
vehicles or collections of machinery. The composite approach to aggregation is applied to dissimilar
operating assets, such as all of the depreciable assets in one manufacturing plant. Individual assets
in the composite may have diverse service lives. Both approaches are similar in that they involve
applying a single straight-line rate based on the average service lives of the assets in the group or
composite.

Question 1111
The allocation of the cost of a natural resource to periods of use is called depletion. The
process otherwise is identical to depreciation. The activity-based units-of-production method is the
predominant method used to calculate depletion, not the time-based straight-line method.
Question 1112
The amortization of finite-life intangible assets is based on the same concepts as depreciation
and depletion. The capitalized cost of an intangible asset that has a finite useful life must be
allocated to the periods the company expects the asset to contribute to its revenue-generating
activities. Intangibles, though, generally have no residual values, so the amortizable base is simply
cost. Also, intangibles possess no physical life to provide an upper bound to service life. However,
most intangibles have a legal or contractual life that limits useful life. Intangible assets that have
indefinite useful lives, including goodwill, are not amortized.
Question 1113
A company can calculate depreciation based on the actual number of days or months the asset
was used during the year. A common simplifying convention is to record one-half of a full years
expense in the years of acquisition and disposal. This is known as the half-year convention. The
modified half-year convention records a full years expense when the asset is acquired in the first
half of the year or sold in the second half. No expense is recorded when the asset is acquired in the
second half of the year or sold in the first half.
Question 1114
A change in the service life of plant and equipment and finite-life intangible assets is
accounted for as a change in an estimate. The change is accounted for prospectively by simply
depreciating the remaining depreciable base of the asset (book value at date of change less estimated
residual value) over the revised remaining service life.
Question 1115
A change in depreciation method is accounted for prospectively by simply depreciating the
remaining depreciable base of the asset (book value at date of change less estimated residual value)
over the revised remaining service life using the new depreciation method, exactly as we would
account for a change in estimate. One difference is that most changes in estimate do not require a
company to justify the change. However, this change in estimate is a result of changing an
accounting principle and therefore requires a clear justification as to why the new method is
preferable. A disclosure note reports the effect of the change on net income and earnings per share
along with clear justification for changing depreciation methods.

Question 1116
If a material error is discovered in an accounting period subsequent to the period in which the
error is made, previous years financial statements that were incorrect as a result of the error are
retrospectively restated to reflect the correction. Any account balances that are incorrect as a result
of the error are corrected by journal entry. If retained earnings is one of the incorrect accounts, the
correction is reported as a prior period adjustment to the beginning balance in the statement of
shareholders equity. In addition, a disclosure note is needed to describe the nature of the error and
the impact of its correction on net income, income before extraordinary items, and earnings per
share.
Question 1117
Impairment of the value of property, plant, and equipment and intangible assets results when
there has been a significant decline in value below carrying value (book value). For property, plant,
and equipment and intangible assets with finite useful lives, GAAP requires an entity to recognize an
impairment loss only when the undiscounted sum of estimated future cash flows from an asset is less
than the assets book value. The loss recognized is the amount by which the book value exceeds the
fair value of the asset or group of assets when the fair value is readily determinable. If fair value is
not determinable, it must be estimated. One method of estimating fair value is to compute the
present value of estimated future cash flows from the asset or group of assets.
For intangible assets with indefinite useful lives other than goodwill, if book value exceeds fair
value, an impairment loss is recognized for the differences. For goodwill, an impairment loss is
indicated if the fair value of the reporting unit is less than its book value. A goodwill impairment
loss is measured as the excess of book value of goodwill over its implied fair value.
For property, plant, and equipment and intangible assets held for sale, if book value exceeds
fair value, an impairment loss is recognized for the difference.
Question 1118
Repairs and maintenance are expenditures made to maintain a given level of benefits provided
by the asset and do not increase future benefits. Expenditures for these activities should be
expensed in the period incurred.
Additions involve adding a new major component to an existing asset. These expenditures
usually are capitalized.
Improvements are expenditures for the replacement of a major component of plant and
equipment. The costs of improvements usually are capitalized.
Rearrangements are expenditures to restructure plant and equipment without addition,
replacement, or improvement. The objective is to create a new capability for the asset and not
necessarily to extend useful life. The costs of material rearrangements should be capitalized if they
clearly increase future benefits.

Answers to Questions (concluded)
Question 1119
IFRS allows a company to value property, plant, and equipment (PP&E) and intangible assets
subsequent to initial valuation at (1) cost less accumulated depreciation/amortization or (2) fair value
(revaluation). If a company chooses revaluation, all assets within a class of PP&E must be revalued
on a regular basis. U.S. GAAP prohibits revaluation.
Question 1120
Under U.S. GAAP, an impairment loss for property, plant, and equipment and finite-life
intangible assets is measured as the difference between book value and fair value. Under IFRS, an
impairment loss is measured as the difference between book value and the recoverable amount. The
recoverable amount is the higher of the assets value in use (present value of estimated future cash
flows) and fair value less costs to sell.
Question 1121
Under U.S. GAAP, the measurement of an impairment loss for goodwill is a two-step process.
In step one we compare the fair value of the reporting unit with its book value. A loss is indicated if
fair value is less than book value. In step two, we measure the impairment loss as the excess of book
value over implied fair value.
Under IFRS, the measurement of an impairment loss for goodwill is a one-step process that
compares the recoverable amount of the cash-generating unit to book value. If the recoverable
amount is less, reduce goodwill first, then other assets. The recoverable amount is the higher of fair
value less costs to sell and value-in-use (present value of estimated future cash flows).
Question 1122
Under IFRS, litigation costs to successfully defend an intangible right are expensed, except in
rare situations when the expenditure increases future benefits.

BRIEF EXERCISES
Brief Exercise 111
Depreciation is a process of cost allocation, not valuation. Koeplin should not
record depreciation expense of $18,000 for year one of the machines life. Instead, it
should distribute the cost of the asset, less any anticipated residual value, over the
estimated useful life in a systematic and rational manner that attempts to match
revenues with the use of the asset, not the periodic decline in its value.

Brief Exercise 112
a. Straight-line:
$30,000 2,000
= $7,000 per year
4 years
b. Sum-of-the-years digits:
Sum-of-the-digits is ([4 (4 + 1)] 2) = 10
2013 $28,000 x 4/10 = $11,200

2014 $28,000 x 3/10 = $ 8,400
c. Double-declining balance:
Straight-line rate is 25% (1 4 years) x 2 = 50% DDB rate
2013 $30,000 x 50% = $15,000

2014 ($30,000 15,000) x 50% = $ 7,500
d. Units-of-production:
$30,000 2,000
= $2.80 per unit depreciation rate
10,000 hours
2013 2,200 hours x $2.80 = $6,160

2014 3,000 hours x $2.80 = $8,400

Brief Exercise 113
a. Straight-line:
$30,000 2,000
= $7,000 per year
4 years
2013 $7,000 x 9/12 = $5,250

2014 $7,000 x 12/12 = $7,000
b. Sum-of-the-years digits:
2013 $28,000 x 4/10 x 9/12 = $8,400
2014 $28,000 x 4/10 x 3/12 = $2,800

+ $28,000 x 3/10 x 9/12 = 6,300
$9,100
c. Double-declining balance:
2013 $30,000 x 50% x 9/12 = $11,250
2014 $30,000 x 50% x 3/12 = $ 3,750

+ ($30,000 15,000) x 50% x 9/12 = 5,625
$ 9,375
or,
2014 ($30,000 11,250) x 50% = $ 9,375

Brief Exercise 114
Annual depreciation will equal the group rate multiplied by the depreciable base
of the group:
($425,000 40,000) x 18% = $69,300
Since depreciation records are not kept on an individual asset basis, dispositions
are recorded under the assumption that the book value of the disposed item exactly
equals any proceeds received and no gain or loss is recorded. Any actual gain or loss
is implicitly included in the accumulated depreciation account.
Journal entry (not required):
Cash ................................................................................ 35,000

Accumulated depreciation (difference) ............................ 7,000
Equipment (account balance) ......................................... 42,000
Brief Exercise 115

$8,250,000
Depletion per ton = = $2.75 per foot
3,000,000 cubic feet
Year 1 depletion = $2.75 x 700,000 feet = $1,925,000

Year 2 depletion = $2.75 x 800,000 feet = $2,200,000

Brief Exercise 116
Expenses for the year include:
Amortization of the patent = $400,000
*
Amortization of the developed technology = 300,000
Total $700,000
Goodwill is not amortized. In-process research and development is not

amortized.

Amortization of the patent:
($4,000,000 5) x 6/12 = $400,000
*Amortization of the developed technology:

($3,000,000 5) x 6/12 = $300,000
Brief Exercise 117

Calculation of annual depreciation after the estimate change:
$9,000,000 Cost
$320,000 Previous annual depreciation ($8 million 25 years)
x 2 years 640,000 Depreciation to date (20112012)
8,360,000 Undepreciated cost
500,000 Revised residual value
7,860,000 Revised depreciable base
18 Estimated remaining life 18 years (20 2)
$ 436,667 2013 depreciation

Brief Exercise 118
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change in
the depreciation method reflects a change in the (a) estimated future benefits from the
asset, (b) the pattern of receiving those benefits, or (c) the companys knowledge
about those benefits, and therefore the two events should be reported the same way.
Accordingly, Robotics reports the change prospectively; previous financial statements
are not revised. Instead, the company simply employs the double-declining-balance
method from now on. The undepreciated cost remaining at the time of the change
would be depreciated DDB over the remaining useful life. A disclosure note should
justify that the change is preferable and should describe the effect of the change on
any financial statement line items and per share amounts affected for all periods
reported.
Assets cost $9,000,000

Accumulated depreciation to date* (640,000)
Undepreciated cost, Jan. 1, 2013 $8,360,000
x 2/23
Double-declining balance depreciation for 2013 $ 726,957
*$8,000,000 25 = $320,000 x 2 years = $640,000

Remaining life is 23 years. Twice the straight-line rate is 2/23.

Brief Exercise 119
If a material error is discovered in an accounting period subsequent to the period
in which the error is made, previous years financial statements that were incorrect as
a result of the error are retrospectively restated to reflect the correction. Any account
balances that are incorrect as a result of the error are corrected by journal entry. If
retained earnings is one of the incorrect accounts, the correction is reported as a prior
period adjustment to the beginning balance in the statement of shareholders equity.
In addition, a disclosure note is needed to describe the nature of the error and the
impact of its correction on net income, income before extraordinary items, and
earnings per share.
In this case, depreciation of $32,000 should have been $320,000 ($8,000,000

25 years). Therefore, 2011 income before tax is overstated by $288,000 ($320,000
32,000) and accumulated depreciation is understated by the same amount. The
following journal entry is needed in 2013 to record the error correction (ignoring
income tax):
Retained earnings ............................................................ 288,000

Accumulated depreciation .......................................... 288,000
Depreciation for 2013 would be $320,000.
Brief Exercise 1110

Because the undiscounted sum of future cash flows of $28 million exceeds book
value of $26.5 million, there is no impairment loss.
Brief Exercise 1111

Because the undiscounted sum of future cash flows of $24 million is less than
book value of $26.5 million, there is an impairment loss. The impairment loss is
calculated as follows:
Book value $26.5 million

Fair value 21.0 million
Impairment loss $ 5.5 million
Brief Exercise 1112
Under IFRS, the impairment loss is the difference between book value and the
recoverable amount. The recoverable amount is $22 million, the higher of the value-
in-use of $22 million (present value of estimated future cash flows) and the $21
million fair value less costs to sell.

Recoverable amount 22.0 million
Impairment loss $ 4.5 million
Brief Exercise 1113

Recoverability: Because the book value of SCCs net assets of $42 million
exceeds the fair value of $40 million, an impairment loss is indicated.
Determination of implied value of goodwill:

Fair value of SCC $40 million
Less: Fair value of SCCs assets (excluding goodwill) 31 million
Implied goodwill $ 9 million
Measurement of impairment loss:

Book value of goodwill $15 million
Less: Implied value of goodwill 9 million
Impairment loss $ 6 million
Brief Exercise 1114

Recoverability: Because the book value of SCCs net assets of $42 million is less
than the fair value of $44 million, an impairment loss is not indicated.

Brief Exercise 1115
recoverable amount of the cash-generating unit. The recoverable amount is $41
million, the higher of the $41 million value-in-use (present value of estimated future
cash flows) and the $40 million fair value less costs to sell.
Book value $42 million

Recoverable amount 41 million
Brief Exercise 1116

Annual maintenance on machinery, $5,400This is an example of normal
repairs and maintenance. Future benefits are not increased; therefore, the
expenditure should be expensed in the period incurred.
Remodeling of offices, $22,000This is an example of an improvement. The

cost of the remodeling should be capitalized and depreciated, either by (1)
substitution, (2) direct capitalization of the cost, or (3) a reduction of accumulated
depreciation.
Rearrangement of the shipping and receiving area, $35,000This is an

example of a rearrangement. Because the rearrangement increased productivity,
the cost should be capitalized and depreciated.
Addition of a security system, $25,000This is an example of an addition.

The cost of the security system should be capitalized and depreciated.

EXERCISES
Exercise 111
1. Straight-line:
$33,000 3,000
= $6,000 per year
5 years
2. Sum-of-the-years digits:
Depreciable Depreciation
Year Base X Rate per Year = Depreciation
2013 $30,000 5 $10,000
15
2014 30,000 4 8,000
15
2015 30,000 3 6,000
15
2016 30,000 2 4,000
15
2017 30,000 1 2,000
15
Total $30,000

Exercise 111 (concluded)
3. Double-declining balance:
Straight-line rate of 20% (1 5 years) x 2 = 40% DDB rate.
Book Value Depreciation

Beginning Rate per Book Value
Year of Year X Year = Depreciation End of Year
2013 $33,000 40% $ 13,200 $19,800
2014 19,800 40% 7,920 11,880
2015 11,880 40% 4,752 7,128
2016 7,128 40% 2,851 4,277
2017 4,277 * 1,277 * 3,000
Total $30,000
* Amount necessary to reduce book value to residual value
4. Units-of-production:
$33,000 3,000
= $.30 per mile depreciation rate
100,000 miles
Actual Depreciation Book Value

Miles Rate per End of
Year Driven X Mile = Depreciation Year
2013 22,000 $.30 $6,600 $26,400
2014 24,000 .30 7,200 19,200
2015 15,000 .30 4,500 14,700
2016 20,000 .30 6,000 8,700
2017 21,000 * 5,700 * 3,000
Totals 102,000 $30,000
* Amount necessary to reduce book value to residual value

Exercise 112
1. Straight-line:
$115,000 5,000
= $11,000 per year
10 years
2013 $110,000 x 10/55 = $20,000

2014 $110,000 x 9/55 = $18,000
2013 $115,000 x 20% = $23,000

2014 ($115,000 23,000) x 20% = $18,400
4. One hundred fifty percent declining balance:
Straight-line rate is 10% (1 10 years) x 1.5 = 15% rate
2013 $115,000 x 15% = $17,250

2014 ($115,000 17,250) x 15% = $14,663
$115,000 5,000
= $.50 per unit depreciation rate
220,000 units
2013 30,000 units x $.50 = $15,000

2014 25,000 units x $.50 = $12,500

Exercise 113
1. Straight-line:
$115,000 5,000
= $11,000 per year
10 years
2013 $11,000 x 3/12 = $ 2,750
2014 $11,000 x 12/12 = $11,000
Sum-of-the-digits is {[10 (10 + 1)]/2} = 55
2013 $110,000 x 10/55 x 3/12 = $ 5,000
2014 $110,000 x 10/55 x 9/12 = $15,000
+ $110,000 x 9/55 x 3/12 = 4,500
$19,500
2013 $115,000 x 20% x 3/12 = $5,750
2014 $115,000 x 20% x 9/12 = $17,250
+ ($115,000 23,000) x 20% x 3/12 = 4,600
$21,850
or,
2014 ($115,000 5,750) x 20% = $21,850
4. One hundred fifty percent declining balance:

Straight-line rate is 10% (1 10 years) x 1.5 = 15% rate
2013 $115,000 x 15% x 3/12 = $ 4,313
2014 $115,000 x 15% x 9/12 = $12,937
+ ($115,000 17,250) x 15% x 3/12 = 3,666
$16,603
Or,
2014 ($115,000 4,313) x 15% = $16,603
$115,000 5,000
= $.50 per unit depreciation rate
220,000 units
2013 10,000 units x $.50 = $ 5,000

2014 25,000 units x $.50 = $12,500
Exercise 114
Building depreciation:
$5,000,000 200,000
= $160,000 per year
30 years
Building addition depreciation:
Remaining useful life from June 30, 2013, is 27.5 years.
$1,650,000
= $60,000 per year
27.5 years
2013 $60,000 x 6/12 = $30,000
2014 $60,000 x 12/12 = $60,000

Exercise 115
Asset A:
$24,000
= $60,000 = Book value at the beginning of year 2
.40
Cost (Cost x 40%) = $60,000
.60Cost = $60,000
Cost = $100,000
Asset B:
Sum-of-the-years digits is 36 {[8 (8 + 1)]2}
($40,000 residual) x 7/36 = $7,000
$280,000 7residual
-------------------------- = $7,000
36
$280,000 7residual = $252,000
7residual = $28,000
Residual = $4,000
Asset C:
$65,000 5,000
= $6,000
Life
Life = 10 years
Asset D:
$230,000 10,000 = $220,000 depreciable base
$220,000 10 years = $22,000 per year
Method used is straight line.
Asset E:
Straight-line rate is 12.5% (1 8 years) x 1.5 = 18.75% rate
Year 1 $200,000 x 18.75% = $37,500
Year 2 ($200,000 37,500) x 18.75% = $30,469
Exercise 116
Requirement 1
1. Straight-line:
$260,000 20,000
= $40,000 per year
6 years
2013 $40,000 x 8/12 = $26,667

2014 $40,000 x 12/12 = $40,000
Sum-of-the-years digits is ([6 (6 + 1)] 2) = 21
2013 $240,000 x 6/21 x 8/12 = $45,714
2014 $240,000 x 6/21 x 4/12 = $22,857

+ $240,000 x 5/21 x 8/12 = 38,095
$60,952
1/6 (the straight-line rate) x 2 = 1/3 DDB rate
2013 $260,000 x 1/3 x 8/12 = $57,778
2014 $260,000 x 1/3 x 4/12 = $28,889

+ ($260,000 86,667) x 1/3 x 8/12 = 38,518
$67,407
or,
2014 ($260,000 57,778) x 1/3 = $67,407

Exercise 117
Requirement 1
U.S. GAAP:
2013: $120,000 8 = $15,000 x 6/12 = $7,500

2014: $120,000 8 = $15,000
Requirement 2
IFRS:
2013: Machine:
$100,000 8 = $12,500 x 6/12 = $6,250
Drill:
$ 20,000 4 = $5,000 x 6/12 = 2,500
Total $8,750
2014: Machine:
$100,000 8 = $12,500
Drill:
$ 20,000 4 = 5,000
Total $17,500

Exercise 118
Requirement 1
Depreciation for 2013: $240,000 6 = $40,000 x 9/12 = $30,000
Requirement 2
($ in thousands) Before After

Revaluation Revaluation
Equipment $240 x 220/210 = $251
Accumulated depreciation 30 x 220/210 = 31
Book value $ 210 x 220/210 = $ 220
Equipment ($251,000 240,000) 11,000

Accumulated depreciation ($31,000 30,000) 1,000
Revaluation surplusOCI ($220,000 210,000) 10,000
Requirement 3
Depreciation for 2014: $220,000 5.25 years = $41,905
Requirement 4
($ in thousands) Before After

Equipment $240 x 195/210 = $223
Accumulated depreciation 30 x 195/210 = 28
Book value $ 210 x 195/210 = $195
Revaluation expense* ($195,000 210,000) 15,000

Accumulated depreciation ($28,000 30,000) 2,000
Equipment ($223,000 240,000) 17,000
*If a revaluation surplus account relating to the same asset had existed, that account
would have been debited up to the amount of its balance before debiting revaluation
expense.

Exercise 119
Requirement 1
Depreciation
Residual Depreciable Estimated per Year
Asset Cost Value Base Life(yrs.) (straight line)
Stoves $15,000 $3,000 $12,000 6 $2,000
Refrigerators 10,000 1,000 9,000 5 1,800
Dishwashers 8,000 500 7,500 4 1,875
Totals $33,000 $4,500 $28,500 $5,675
$5,675
Group depreciation rate = = 17.2% (rounded)
$33,000
Group life = $28,500

= 5.02 years (rounded)
$5,675
Requirement 2
To record the purchase of new refrigerators.
Refrigerators.................................................................... 2,700
Cash ............................................................................. 2,700
To record the sale of old refrigerators.
Cash ................................................................................. 200

Accumulated depreciation (difference) ............................. 1,300
Refrigerators................................................................ 1,500

Exercise 1110
Requirement 1
Cost of the equipment:
Purchase price $154,000
Freight charges 2,000
Installation charges 4,000
$160,000
Straight-line rate of 12.5% (1 8 years) x 2 = 25% DDB rate.
Book Value
Beginning Depreciation Book Value
Year of Year X Rate per Year = Depreciation End of Year
2013 $160,000 25% $ 40,000 $120,000
2014 120,000 25% 30,000 90,000
2015 90,000 25% 22,500 67,500
2016 67,500 25% 16,875 50,625
2017 50,625 * 5,000 45,625
2018 45,625 * 5,000 40,625
2019 40,625 * 5,000 35,625
2020 35,625 * 5,000 30,625
Total $129,375
* Switch to straight-line in 2017:
Straight-line depreciation:
$50,625 30,625
= $5,000 per year
4 years
Requirement 2
For plant and equipment used in the manufacture of a product, depreciation is a
product cost and is included in the cost of inventory. Eventually, when the product is
sold, depreciation will be included in cost of goods sold.

Exercise 1111
Requirement 1
$4,500,000
Depletion per ton = = $5.00 per ton
900,000 tons
2013 depletion = $5.00 x 240,000 tons = $1,200,000
Requirement 2
Depletion is part of product cost and is included in the cost of the inventory of
coal, just as the depreciation on manufacturing equipment is included in inventory
cost. The depletion is then included in cost of goods sold in the income statement
when the coal is sold.
Exercise 1112
Timber tract:
$3,200,000 600,000 = $.52 per board foot

5,000,000 board feet
500,000 x $.52 = $260,000 depletion
Logging roads:
$240,000 5,000,000 board feet = $.048 per board foot
500,000 x $.048 = $24,000 depreciation

Exercise 1113
Requirement 1
Cost of copper mine:
Mining site $1,000,000
Development costs 600,000
Restoration costs 303,939
$1,903,939

$300,000 x 25% = $ 75,000
400,000 x 40% = 160,000
600,000 x 35% = 210,000
$445,000 x .68301* = $303,939
*Present value of $1, n = 4, i = 10% (Table 2)
Depletion:
$1,903,939
Depletion per pound = = $.1904 per pound
10,000,000 pounds
2013 depletion = $.1904 x 1,600,000 pounds = $304,640

2014 depletion = $.1904 x 3,000,000 pounds = $571,200
Depreciation:
$120,000 20,000
Depreciation per pound = = $.01 per pound
10,000,000 pounds
2013 depreciation = $.01 x 1,600,000 pounds = $16,000

2014 depreciation = $.01 x 3,000,000 pounds = $30,000
Requirement 2
Depletion of natural resources and depreciation of assets used in the extraction of
natural resources are part of product cost and are included in the cost of the inventory
of copper, just as the depreciation on manufacturing equipment is included in
inventory cost. The depletion and depreciation are then included in cost of goods sold
in the income statement when the copper is sold.

Exercise 1114
Requirement 1
a. To record the purchase of a patent.
January 1, 2011
Patent ............................................................................... 700,000
Cash ............................................................................. 700,000
To record amortization on the patent.
December 31, 2011 and 2012

Amortization expense ($700,000 10 years) ...................... 70,000
Patent ........................................................................... 70,000
b. To record the purchase of a franchise.
2013
Franchise ......................................................................... 500,000
Cash ............................................................................. 500,000
c. To record research and development expenses.
2013
Research and development expense................................ 380,000
Cash ............................................................................. 380,000

Year-end adjusting entries
Patent: To record amortization on the patent after change in useful life.
December 31, 2013

Amortization expense (determined below) ......................... 112,000
Patent .......................................................................... 112,000
Calculation of annual amortization after the estimate change:

($ in thousands)
$700 Cost
$70 Previous annual amortization ($700 10 years)
x 2 years 140 Amortization to date (20112012)
560 Unamortized cost (balance in the patent account)
5 Estimated remaining life
$112 New annual amortization
Franchise: To record amortization of franchise.
December 31, 2013

Amortization expense ($500,000 10 years) ...................... 50,000
Franchise ..................................................................... 50,000
Requirement 2
Intangible assets:
Patent $448,000 [1]

Franchise 450,000 [2]
Total intangibles $898,000
[1] $560,000 112,000

[2] $500,000 50,000
Exercise 1115
To record the purchase of a patent.
January 2, 2013
Patent ............................................................................... 500,000
Cash ............................................................................. 500,000
To record amortization of a patent for the year 2013.
Amortization expense ($500,000 8 years) ........................ 62,500

Patent ........................................................................... 62,500
To record amortization of the patent for the year 2014.
Amortization expense ($500,000 8 years) ........................ 62,500

Patent ........................................................................... 62,500
To record costs of successfully defending a patent infringement suit.
January, 2015
Patent ............................................................................... 45,000
Cash ............................................................................. 45,000

To record amortization of patent for the year 2015.
Amortization expense (determined below) ......................... 70,000

Patent .......................................................................... 70,000
Calculation of revised annual amortization:

($ in thousands)
$500 Cost
$62.5 Previous annual amortization ($500 8 years)
45 Add
420 New unamortized cost
6 Estimated remaining life (8 years 2 years)
$ 70 New annual amortization
Exercise 1116
($ in millions)
Amortization expense (determined below) ......................... 2.5
Patent .......................................................................... 2.5
Calculation of annual amortization after the estimate change:

$ in millions)
$9 Cost
$1 Previous annual amortization ($9 9 years)
$2.5 New annual amortization

Exercise 1117
Requirement 1
2013 amortization: $1,200,000 10 = $120,000 x 6/12 = $60,000
Requirement 2
Franchise ($1,180,000 [$1,200,000 60,000]) 40,000

Revaluation surplusOCI 40,000
Requirement 3
2014 amortization: $1,180,000 9.5 = $124,211

Exercise 1118
Requirement 1
Depreciation expense (determined below) .......................... 3,088

Accumulated depreciationcomputer ....................... 3,088
$40,000 Cost
$7,200 Previous annual depreciation ($36,000 5 years)
x 2 years 14,400 Depreciation to date (20112012)
25,600 Undepreciated cost
900 Revised residual value
24,700 Revised depreciable base
$ 3,088 New annual depreciation
Requirement 2

Accumulated depreciationcomputer ....................... 3,889
$40,000 Cost
Previous depreciation:
$12,000 2011 ($36,000 x 5/15)
9,600 2012 ($36,000 x 4/15)
21,600 Depreciation to date (20112012)
900 Revised residual value
17,500 Revised depreciable base
x 8/36 Estimated remaining life 8 years
$ 3,889 2013 depreciation

Exercise 1119
SYD depreciation
[10 + 9 + 8 x ($1.5 .3) million] = $589,091
55
$1,500,000 Cost
589,091 Depreciation to date, SYD (20102012)
910,909 Undepreciated cost as of 1/1/13
300,000 Less residual value
610,909 Depreciable base
7 yrs. Remaining life (10 years 3 years)
Adjusting entry (2013 depreciation):
Depreciation expense (calculated above) ............................ 87,273

Accumulated depreciation........................................... 87,273

Exercise 1120
Requirement 1
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change in
the depreciation method reflects a change in the (a) estimated future benefits from the
asset, (b) the pattern of receiving those benefits, or (c) the companys knowledge
about those benefits, and therefore the two events should be reported the same way.
Accordingly, Clinton reports the change prospectively; previous financial statements
are not revised. Instead, the company simply employs the straight-line method from
now on. The undepreciated cost remaining at the time of the change would be
depreciated straight line over the remaining useful life. A disclosure note should
justify that the change is preferable and should describe the effect of the change on
any financial statement line items and per share amounts affected for all periods
reported.
Requirement 2
Assets cost $2,560,000
Accumulated depreciation to date (given) (1,801,000)
Undepreciated cost, Jan. 1, 2013 $ 759,000
Estimated residual value (160,000)
To be depreciated over remaining 3 years $ 599,000
3 years
Annual straight-line depreciation 20132015 $ 199,667 (rounded)
Adjusting entry:
Depreciation expense (calculated above) ............ 199,667
Accumulated depreciation .......................... 199,667

Exercise 1121
Requirement 1
Analysis:
Correct Incorrect
(Should Have Been Recorded) (As Recorded)
2010 Machine 350,000 Expense 350,000

Cash 350,000 Cash 350,000
2010 Expense 70,000 Depreciation entry omitted

Accum. deprec. 70,000

During the three-year period, depreciation expense was understated by

$210,000, but other expenses were overstated by $350,000, so net income
during the period was understated by $140,000, which means retained
earnings is currently understated by that amount.
During the three-year period, accumulated depreciation was understated, and

continues to be understated by $210,000.
To correct incorrect accounts

Machine .............................................................. 350,000
Accumulated depreciation ($70,000 x 3 years) ... 210,000
Retained earnings ($350,000 210,000) ............. 140,000
Requirement 2
Correcting entry:
Assuming that the machine had been disposed of, no correcting entry would be
required because, after five years, the accounts would show appropriate
balances.

Exercise 1122
Requirement 1
Fair value 3.5 million
Impairment loss $3.0 million
Requirement 2
Because the undiscounted sum of future cash flows of $6.8 million exceeds book
value of $6.5 million, there is no impairment loss.

Exercise 1123
Requirement 1
IFRS requires an impairment loss to be recognized when an assets book value
exceeds the higher of the assets value-in-use (present value of estimated future cash
flows) and fair value less costs to sell. In this case, value-in-use and fair value less
costs to sell are the same, $3.5 million. Because book value ($6.5 million) exceeds
this amount, a loss is indicated. The loss is the difference between book value and the
recoverable amount, which also is the higher of the assets value-in-use (present value
of estimated future cash flows) and fair value less costs to sell. Therefore, the amount
of impairment loss is the same as under U.S. GAAP, $3 million.

Requirement 2
An impairment loss also is indicated because book value ($6.5 million) exceeds
fair value less costs to sell/value-in-use ($5 million). The amount of impairment loss
is $1.5 million.

Under U.S. GAAP, because the undiscounted sum of future cash flows of $6.8
million exceeds book value of $6.5 million, there is no impairment loss.

Exercise 1124
Requirement 1
IFRS requires an impairment loss to be recognized when an assets book value
exceeds the higher of the assets value-in-use (present value of estimated future cash
flows) and fair value less costs to sell. In this case, value-in-use of 150 million is
higher. Because book value (220 million) exceeds this amount, a loss is indicated.
The loss is the difference between book value and the recoverable amount, which also
is the higher of the assets value-in-use (present value of estimated future cash flows)
and fair value less costs to sell. The amount of impairment loss is 70 million.
Book value 220 million

Impairment loss 70 million
Requirement 2
U.S. GAAP requires an impairment loss to be recognized when an assets book
value exceeds the undiscounted sum of estimated future cash flows. In this case, a
loss is indicated because the book value of 220 million exceeds the undiscounted
sum of estimated future cash flows of 210 million. The loss is the difference between
book value and fair value, or $75 million in this case.
Book value 220 million

Fair value 145 million

Exercise 1125
Requirement 1
An impairment loss is indicated because the estimated undiscounted sum of
future cash flows of $15 million is less than the book value of $18.3 million.
The amount of the loss to be reported is calculated using the estimated fair value
rather than the undiscounted future cash flows:
Book value $18,300,000

Estimated fair value 11,000,000
Impairment loss $ 7,300,000
Requirement 2
The loss would appear in the income statement along with other operating
expenses.
Requirement 3
Loss on impairment ............................................ 7,300,000

Accumulated depreciation .................................. 14,200,000
Plant assets ...................................................... 21,500,000
Requirement 4
An impairment loss is indicated because the estimated undiscounted sum of
future cash flows of $12 million is less than the book value of $18.3 million.
The amount of the loss to be reported is calculated using the estimated fair value
rather than the undiscounted future cash flows:
Book value $18,300,000

Estimated fair value 11,000,000
Impairment loss $ 7,300,000
Requirement 5
Because the estimated undiscounted sum of future cash flows of $19 million
exceeds the book value of $18.3 million, no impairment loss is indicated.

Exercise 1126
Requirement 1
Determination of implied goodwill:
Fair value of Centerpoint, Inc. $220 million
Fair value of Centerpoints net assets (excluding goodwill) 200 million
Implied value of goodwill $ 20 million

Implied value of goodwill 20 million
Impairment loss $30 million
Requirement 2
Because the fair value of the reporting unit, $270 million, exceeds book value,
$250 million, there is no impairment loss.
Exercise 1127
recoverable amount of the cash-generating unit. The recoverable amount is $225
million, the higher of the $225 million value-in-use (present value of estimated future
cash flows) and the $220 million fair value less costs to sell.


Exercise 1128
Requirement 1
Calculation of goodwill:
Consideration exchanged $420 million

Less fair value of net assets:
Assets $512 million
Less: Liabilities assumed (150) million (362) million
Goodwill $ 58 million
Requirement 2
Because the book value of the net assets ($410 million) exceeds fair value ($400
million), an impairment loss is indicated.

Fair value of Harman, Inc. $400 million
Fair value of Harmans net assets (excluding goodwill) 370 million

Book value of goodwill (determined in requirement 1) $ 58 million
Implied value of goodwill 30 million
Requirement 3
Entry to record the impairment loss:

($ in millions)
Loss on impairment of goodwill ........................ 28
Goodwill ......................................................... 28

Exercise 1129
Requirement 1
The Codification topic number that provides guidance on accounting for the
impairment of long-lived assets is FASB ASC 360: Property, Plant, and Equipment.
Requirement 2
The specific citation that discusses the disclosures required in the notes to the
financial statements for the impairment of long-lived assets classified as held and used
is FASB ASC 36010502: Property, Plant, and EquipmentOverallDisclosure
Impairment or Disposal of Long-Lived Assets.
Requirement 3
All of the following information shall be disclosed in the notes to financial

statements that include the period in which an impairment loss is recognized:
a. A description of the impaired long-lived asset (asset group) and the facts and
circumstances leading to the impairment
b. If not separately presented on the face of the statement, the amount of the
impairment loss and the caption in the income statement or the statement of
activities that includes that loss
c. The method or methods for determining fair value (whether based on a
quoted market price, prices for similar assets, or another valuation technique)
d. If applicable, the segment in which the impaired long-lived asset (asset
group) is reported under Topic 280.

Exercise 1130
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific
citation for each of the following items is:
1. Depreciation involves a systematic and rational allocation of cost

rather than a process of valuation:
FASB ASC 36010354: Property, Plant, and EquipmentOverall
Subsequent MeasurementDepreciation.
The cost of a productive facility is one of the costs of the services it
renders during its useful economic life. Generally accepted accounting
principles (GAAP) require that this cost be spread over the expected
useful life of the facility in such a way as to allocate it as equitably as
possible to the periods during which services are obtained from the use of
the facility. This procedure is known as depreciation accounting, a
system of accounting that aims to distribute the cost or other basic value
of tangible capital assets, less salvage (if any), over the estimated useful
life of the unit (which may be a group of assets) in a systematic and
rational manner. It is a process of allocation, not of valuation.
2. The calculation of an impairment loss for property, plant, and

equipment:
FASB ASC 360103517: Property, Plant, and EquipmentOverall
Subsequent Measurement.
An impairment loss shall be recognized only if the carrying amount of a
long-lived asset (asset group) is not recoverable and exceeds its fair
value. The carrying amount of a long-lived asset (asset group) is not
recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset (asset group).
That assessment shall be based on the carrying amount of the asset (asset
group) at the date it is tested for recoverability, whether in use or under
development. An impairment loss shall be measured as the amount by
which the carrying amount of a long-lived asset (asset group) exceeds its
fair value.

3. Accounting for a change in depreciation method:

FASB ASC 250104518: Accounting Changes and Error
CorrectionOverallOther Presentation Matters.
Distinguishing between a change in an accounting principle and a change
in an accounting estimate is sometimes difficult. In some cases, a change
in accounting estimate is effected by a change in accounting principle.
One example of this type of change is a change in method of
depreciation, amortization, or depletion for long-lived, nonfinancial
assets (hereinafter referred to as depreciation method). The new
depreciation method is adopted in partial or complete recognition of a
change in the estimated future benefits inherent in the asset, the pattern of
consumption of those benefits, or the information available to the entity
about those benefits. The effect of the change in accounting principle, or
the method of applying it, may be inseparable from the effect of the
change in accounting estimate. Changes of that type often are related to
the continuing process of obtaining additional information and revising
estimates and, therefore, shall be considered changes in estimates for
purposes of applying this subtopic.
4. Goodwill should not be amortized:

FASB ASC 35020351: Intangibles-Goodwill and OtherGoodwill
Subsequent Measurement.
Goodwill shall not be amortized. Instead, goodwill shall be tested for
impairment at a level of reporting referred to as a reporting unit.

Exercise 1131
1. To record the replacement of the heating system.
Accumulated depreciationbuilding ............................. 250,000

Cash ............................................................................. 250,000
2. To record the addition to the building.
Building ........................................................................... 750,000

Cash ............................................................................. 750,000
3. To expense annual maintenance costs.
Maintenance expense ...................................................... 14,000

Cash ............................................................................. 14,000
4. To capitalize rearrangement costs.
Machinery ....................................................................... 50,000

Cash ............................................................................. 50,000

Exercise 1132
Requirement 1
2011 amortization: $6,000,000 10 = $600,000 x 3/12 = $150,000

2012 amortization: $6,000,000 10 = $600,000
Requirement 2
Patent 500,000
Cash 500,000
Requirement 3
Calculation of revised annual amortization:
$6,000,000 Cost
750,000 Amortization to date (above)
5,250,000 Unamortized cost (balance in the patent account)
500,000 Add
5,750,000 New unamortized cost
8 3/4 Estimated remaining life (10 years 1 1/4 years)
$ 657,143 New annual amortization
Requirement 4
Requirement 2:
Litigation expense 500,000

Cash 500,000
Requirement 3:
2013 amortization: $6,000,000 10 = $600,000

Exercise 1133
Requirement 1
Cash ................................................................................. 17,000

Accumulated depreciationlathe (determined below)....... 56,250
Loss on sale (difference) .................................................... 6,750
Lathe (balance) .............................................................. 80,000
Accumulated depreciation:
$80,000 5,000
Annual depreciation = = $15,000
5 years
2009 $15,000 x 1/2 = $ 7,500

2010 15,000
2011 15,000
2012 15,000
2013 $15,000 x 1/4 = 3,750
Total $56,250

Requirement 2
Cash ................................................................................ 17,000

Accumulated depreciationlathe (determined below) ...... 67,500
Gain on sale (difference) ............................................... 4,500
Lathe (balance) ............................................................. 80,000
Accumulated depreciation:
Sum-of-the-digits is ([5 (5 + 1)]/2) = 15
2009 $75,000 x 5/15 x 6/12 = $12,500
2010 $75,000 x 5/15 x 6/12 = $12,500

+ $75,000 x 4/15 x 6/12 = 10,000 22,500
2011 $75,000 x 4/15 x 6/12 = $10,000

+ $75,000 x 3/15 x 6/12 = 7,500 17,500
2012 $75,000 x 3/15 x 6/12 = $ 7,500

+ $75,000 x 2/15 x 6/12 = 5,000 12,500
2013 $75,000 x 2/15 x 3/12 = 2,500

Total $67,500

Exercise 1134
List A List B
g 1. Depreciation a. Cost allocation for natural resource.
d 2. Service life b. Accounted for prospectively.
f 3. Depreciable base c. When there has been a significant
decline in value.
e 4. Activity-based method d. The amount of use expected from
plant and equipment and finite-life
intangible assets.
m 5. Time-based method e. Estimates service life in units of output.
h 6. Double-declining balance f. Cost less residual value.
j 7. Group method g. Cost allocation for plant and equipment.
k 8. Composite method h. Does not subtract residual value from cost.
a 9. Depletion i. Accounted for the same way as a change in
estimate.
l 10. Amortization j. Aggregates assets that are similar.
b 11. Change in useful life k. Aggregates assets that are physically
unified.
i 12. Change in depreciation l. Cost allocation for an intangible asset.
method
c 13. Write-down of asset m. Estimates service life in years.

Exercise 1135
Requirement 1
To record the acquisition of small tools.
2011
Small tools ..................................................................... 8,000
Cash ............................................................................ 8,000
To record additional small tool acquisitions.
2013
Small tools ...................................................................... 2,500
Cash ............................................................................ 2,500
To record the sale/depreciation of small tools.
2013
Cash ............................................................................... 250
Depreciation expense (difference) .................................... 1,750
Small tools .................................................................. 2,000

Requirement 2
To record the acquisition of small tools.
2011
Small tools ...................................................................... 8,000
Cash ............................................................................. 8,000
To record the replacement/depreciation of small tools.
2013
Depreciation expense ..................................................... 2,500
Cash ............................................................................. 2,500
To record the sale of small tools.
2013
Cash ................................................................................ 250
Depreciation expense .................................................. 250

CPA / CMA REVIEW QUESTIONS
CPA Exam Questions
1. a. Double-declining-balance depreciation rate = 2 x 1/8 = or 25%
First year depreciation will be $7,500 x 0.25 = $1,875
Second year depreciation will be ($7,500 1,875) x 0.25 = $1,406
2. b. The depreciation method used must be straight line because year 1
depreciation is $7,400 (($40,000 3,000) / 5 = $7,400). Year 2 depreciation
would also be $7,400.
3. b. $20,000/5,000,000 gallons = $0.004/gallon
($0.004/gallon) x (250,000 gallons) = $1,000
4. d. Goodwill is an indefinite life intangible asset and is therefore not amortized.
5. c. $50,000 10 years = $5,000 per year in amortization. $50,000 5,000 =
$45,000. The 3% franchise fee is a period expense and is not capitalized.
6. c. First two years = ($60,000 0) 10 = $6,000 per year

Year 2013 = [$60,000 (2 x $6,000) 3,000] 3 = $15,000
7. d. The book value of the stamping machine is its cost less accumulated
depreciation. Depreciation taken through 2013 was [($22,000,000
4,000,000) / 12] x 7 = $10,500,000 so book value is ($22,000,000
10,500,000) = $11,500,000. Because the $11,500,000 book value is more
than expected future cash flows of [(5 x $1,500,000) + 1,000,000] =
$8,500,000, the stamping machine is impaired.
8. d. $147,000. All of the expenditures are capitalized.

CPA Exam Questions (concluded)
9. c. $12,000.
$80,000 10 years = $ 8,000

20,000 5 years = 4,000
Total depreciation = $12,000
10. a. When as asset is revalued, the entire class of property, plant, and equipment
to which the asset belongs must be revalued.
11. b. A decrease in income. If book value is higher than fair value, the difference
is reported as an expense in the income statement.
12. b. An active market must exist for an intangible asset to be revalued.
13. c. $70 million. Book value of $400 million 330 million recoverable amount
(higher of fair value less costs to sell and present value of future cash flows).
14. d. $45 million. Book value of $500 million 455 million recoverable amount
(higher of fair value less costs to sell and present value of future cash flows).

CMA Exam Questions
1. d. Because 50% of the original estimate of quality ore was recovered during
the years 2004 through 2011, recorded depletion of $250,000 [50% x
($600,000 100,000 salvage value)]. In 2012, the earlier depletion of
$250,000 is deducted from the $600,000 cost along with the $100,000
salvage value. The remaining depletable cost of $250,000 will be allocated
over the 250,000 tons believed to remain in the mine. The $1 per ton
depletion is then multiplied times the tons mined each year.
2. a. Given that the company paid $6,000,000 for net assets acquired with a fair
value of $5,496,000, goodwill was $504,000. According to GAAP, acquired
goodwill is not amortized but is qualitatively assessed and/or tested annually
for impairment.
3. a. The cost should be amortized over the remaining legal life or useful life,
whichever is shorter. In addition to the initial costs of obtaining a patent,
legal fees incurred in the successful defense of a patent should be capitalized
as part of the cost, whether it was internally developed or purchased from an
inventor. The legal fees capitalized then should be amortized over the
remaining useful life of the patent.

PROBLEMS
Problem 111
Requirement 1
Determine useful life:
$200,000 depreciable base
= 20-year useful life
$10,000 annual depreciation
Determine age of assets:
$40,000 accumulated depreciation
= 4 years old
Double-declining balance in 4th year of life:
Year 1 (2010) $200,000 x 10% = $20,000
Year 2 (2011) 180,000 x 10% = 18,000
Year 3 (2012) 162,000 x 10% = 16,200
Year 4 (2013) 145,800 x 10% = 14,580
Requirement 2
Depreciation expense (below) ...................... 20,000

Accumulated depreciation .................... 20,000
$200,000 Cost
30,000 Depreciation to date, SL 3 years (20102012)
$170,000 Undepreciated cost as of 1/1/13
Seventeen-year remaining life, or 1/17 x 2 = 2/17 = x $170,000 = $20,000
A disclosure note reports the effect of the change on net income and earnings
per share along with clear justification for changing depreciation methods.

Problem 112
Requirement 1
CORD COMPANY
Analysis of Changes in Plant Assets
For the Year Ending December 31, 2013
Balance Balance
12/31/12 Increase Decrease 12/31/13
Land $ 175,000 $ 312,500 [1] $ -- $ 487,500
Land improvements -- 192,000 -- 192,000
Buildings 1,500,000 937,500 [1] -- 2,437,500
Machinery and equipment 1,125,000 385,000 [2] 17,000 1,493,000
Automobiles and trucks 172,000 12,500 24,000 160,500
Leasehold improvements 216,000 -- -- 216,000
$3,188,000 $1,839,500 $41,000 $4,986,500
Explanations of Amounts:
[1] Plant facility acquired from King 1/6/13allocation to Land and Building:
Fair value25,000 shares of Cord common
stock at $50 per share fair value $1,250,000
Allocation in proportion to appraised values at date of exchange:

% of
Amount Total
Land $187,500 25
Building 562,500 75
$750,000 100
Land $1,250,000 x 25% = $ 312,500

Building $1,250,000 x 75% = 937,500
$1,250,000
[2] Machinery and equipment purchased 7/1/13:

Invoice cost $325,000
Delivery cost 10,000
Installation cost 50,000
Total acquisition cost $385,000

Problem 112 (continued)
Requirement 2
CORD COMPANY
Depreciation and Amortization Expense
For the Year Ended December 31, 2013
Land Improvements:
Cost $192,000
Straight-line rate (1 12 years) x 8 1/3%
Annual depreciation 16,000
Depreciation on land improvements for 2013:
(3/25 to 12/31/13) x 3/4 $ 12,000
Buildings:
Book value, 1/1/13 ($1,500,000 328,900) $1,171,100
Building acquired 1/6/13 937,500
Total amount subject to depreciation 2,108,600
150% declining balance rate:
(1 25 years = 4% x 1.5) x 6% $ 126,516
Machinery and equipment:
Balance, 1/1/13 $1,125,000
Straight-line rate (1 10 years) x 10% 112,500
Purchased on 7/1/13 385,000
Depreciation for one-half year x 5% 19,250
Depreciation on machinery and equipment for 2013 $ 131,750
Automobiles and trucks:
Book value, 1/1/13 ($172,000 100,325) $71,675
Deduct 1/1/13 book value of truck sold
on 9/30 ($9,100 + 2,650) (11,750)
Amount subject to depreciation 59,925
(1 5 years = 20% x 1.5) x 30% 17,978
Automobile purchased 8/30/13 12,500
Depreciation for 2013 (30% x 4/12) x 10% 1,250
Truck sold on 9/30/13 depreciation (given) 2,650
Depreciation on automobiles and trucks $ 21,878

Problem 112 (concluded)
Leasehold improvements:
Book value, 1/1/13 ($216,000 108,000) $108,000
Amortization period (1/1/13 to 12/31/17) 5 years
Amortization of leasehold improvements for 2013 $ 21,600
Total depreciation and amortization expense for 2013 $313,744
Problem 113
PELL CORPORATION
Depreciation Expense
For the Year Ended December 31, 2013
Land improvements:
Cost $ 180,000
Straight-line rate (1 15 years) x 6 2/3% $ 12,000
Building:
Book value 12/31/12 ($1,500,000 350,000) $1,150,000
(1 20 years = 5% x 1.5) x 7.5% $ 86,250
Machinery and Equipment:

Balance, 12/31/12 $1,158,000
Deduct machine sold (58,000) $1,100,000
Straight-line rate (1 10 years) x 10% 110,000
Purchased 1/2/13 287,000
Depreciation x 10% 28,700
Machine sold 3/31/13 58,000
Depreciation for three months x 2.5% 1,450
Total depreciation on machinery and equipment $140,150
Automobiles:
Book value on 12/31/12 ($150,000 112,000) $38,000
(1 3 years = 33.333% x 1.5) x 50% $ 19,000
Total depreciation expense for 2013 $257,400
Problem 114
1. Depreciation for 2011 and 2012.
December 31, 2011

Depreciation expense ($48,000 8 years x 9/12) ................. 4,500
Accumulated depreciationequipment...................... 4,500
December 31, 2012

Depreciation expense ($48,000 8 years) .......................... 6,000
2. The year 2013 expenditure.
January 4, 2013
Repair and maintenance expense .................................... 2,000
Equipment ....................................................................... 10,350
Cash ............................................................................. 12,350
3. Depreciation for the year 2013.
December 31, 2013


$ 48,000 Cost
10,500 Depreciation to date ($4,500 + 6,000)
10,350 Asset addition
47,850 New depreciable base
8 1/4 Estimated remaining life (10 years 1 3/4 years)
Problem 115
(1) $65,000
Allocation in proportion to appraised values at date of exchange:
% of
Amount Total
Land $72,000 8
Building 828,000 92
$900,000 100
Land $812,500 x 8% = $ 65,000
Building $812,500 x 92% = 747,500
$812,500
(2) $747,500 [From (1)]
(3) 50 years $747,500 47,500

(4) $ 14,000 Same as prior year, since method used is straight line.
(5) $ 85,400 3,000 shares x $25 per share = $75,000
Plus demolition of old building 10,400
$85,400
(6) None No depreciation before use.
(7) $ 16,000 Fair value.
(8) $ 2,400 $16,000 x 15% (1.5 x Straight-line rate of 10%).
(9) $ 2,040 ($16,000 2,400) x 15%.
(10) $ 99,000 Total cost of $110,000 11,000 in normal repairs.
(11) $ 17,000 ($99,000 5,500) x 10/55.
(12) $ 5,100 ($99,000 5,500) x 9/55 x 4/12.
(13) $ 30,840 PVAD = $4,000 (7.71008 * )
* Present value of an annuity due of $1: n = 11, i = 8% (from Table 6)
(14) $ 2,056 $30,840

15 years
Problem 116
Requirement 1
Building:
$500,000
= $20,000 per year x 9/12 = $15,000
25 years
Machinery:
$240,000 (10% x $240,000)

= $27,000 per year x 9/12 = $20,250
8 years
Equipment:
Sum-of-the-digits is ([6 (6 + 1)]2) = 21
($160,000 13,000) x 6/21 = $42,000 x 9/12 = $31,500

Requirement 2
(1)
June 29, 2014

Accumulated depreciationmachinery...................... 5,625
$100,000 (10% x $100,000)

= $11,250 x 6/12 = $5,625
8 years

(2)
June 29, 2014

Cash ................................................................................ 80,000
Accumulated depreciationmachinery (below) ............. 14,063
Loss on sale of machinery (difference) ............................. 5,937
Machinery ................................................................... 100,000
Accumulated depreciation on machinery sold:
2013 depreciation = $11,250 x 9/12 = $ 8,438

2014 depreciation = $11,250 x 6/12 5,625
Total $14,063
Requirement 3
Building:
$500,000
= $20,000
25 years
Machinery:
$140,000 (10% x $140,000)

= $15,750
8 years
Equipment:
($160,000 13,000) x 6/21 = $42,000 x 3/12 = $10,500

+ ($160,000 13,000) x 5/21 = $35,000 x 9/12 = 26,250
$36,750

Problem 117
Requirement 1
Cost of mineral mine:
Purchase price $1,600,000
Development costs 600,000
$2,200,000
Depletion:
$2,200,000 100,000
Depletion per ton = = $5.25 per ton
400,000 tons
2013 depletion = $5.25 x 50,000 tons = $262,500
2014 depletion:
Revised depletion rate = ($2,200,000 262,500) 100,000
= $4.20
487,500 50,000 tons
2014 depletion = $4.20 x 80,000 tons = $336,000
Depreciation:
Structures:
$150,000
Depreciation per ton = = $.375 per ton
400,000 tons
2013 depreciation = $.375 x 50,000 tons = $18,750
2014 depreciation:
Revised depreciation rate = $150,000 18,750
= $.30 per ton
487,500 50,000 tons

Equipment:
$80,000 4,000
Depreciation per ton = = $.19 per ton
400,000 tons
2014 depreciation:
Revised depreciation rate = ($80,000 9,500) 4,000
= $.152 per ton
487,500 50,000 tons
Requirement 2
Mineral mine:
Cost $ 2,200,000
Less accumulated depletion:
2013 depletion $262,500
2014 depletion 336,000 598,500
Book value, 12/31/14 $1,601,500
Structures:
Cost $ 150,000
Less accumulated depreciation:
2013 depreciation $18,750
2014 depreciation 24,000 42,750
Book value, 12/31/14 $107,250
Equipment:
Cost $ 80,000
2013 depreciation $ 9,500
2014 depreciation 12,160 21,660
Book value, 12/31/14 $58,340

Requirement 3
natural resources are part of product cost and are included in the cost of the inventory
of the mineral, just as the depreciation on manufacturing equipment is included in
inventory cost. The depletion and depreciation are then included in cost of goods sold
in the income statement when the mineral is sold.
In 2013, since all of the ore was sold, all of 2013s depletion and depreciation is
included in cost of goods sold. In 2014, since not all of the extracted ore was sold, a
portion of both 2014s depletion and depreciation remains in inventory.

Problem 118
Requirement 1
Calculation of goodwill:
Consideration exchanged $2,000,000

Less: Fair value of net identifiable assets 1,700,000
Goodwill acquired $ 300,000
The cost of goodwill is not amortized.
To record amortization of patent.
Amortization ($80,000 8 years x 6/12) .............................. 5,000

Patent .......................................................................... 5,000
To record amortization of franchise.
Amortization expense ($200,000 10 years x 3/12) ............. 5,000

Franchise ..................................................................... 5,000

Requirement 2
Intangible assets:
Goodwill $300,000 [1]

Patent 75,000 [2]
Franchise 195,000 [3]
Total intangibles $570,000
[1] $300,000
[2] $ 80,000 5,000
[3] $200,000 5,000

Problem 119
Requirement 1
Machine 101:
$70,000 7,000
= $6,300 per year x 3 years = $ 18,900
10 years
Machine 102:
$80,000 8,000
= $9,000 per year x 1.5 years = 13,500
8 years
Machine 103:
$30,000 3,000
= $3,000 per year x 4/12 = 1,000
9 years
Accumulated depreciation, 12/31/12 $33,400
Requirement 2
To record depreciation on machine 102 through date of sale.
March 31, 2013

Depreciation expense ($9,000 per year x 3/12) .................... 2,250
Accumulated depreciationequipment ..................... 2,250
To record sale of equipment.
March 31, 2013

Cash ................................................................................ 52,500
Accumulated depreciation ($13,500 + 2,250) .................... 15,750
Loss on sale of equipment (determined below) .................. 11,750
Equipment ................................................................... 80,000

Loss on sale of machine 102:
Proceeds $52,500
Less book value on 3/31/13:
Cost $80,000
Depreciation through 12/31/12 $13,500
Depreciation from 1/1/13 to
3/31/13 ($9,000 x 3/12) 2,250 15,750 64,250
Loss on sale $11,750
Requirement 3
Building:
Useful life of the building:
$200,000
= $40,000 in depreciation per year
5 years
(20082012)
$840,000 $40,000
= 20-year useful life
$40,000
To record depreciation on the building.
Depreciation expense [($840,000 40,000) 20 years] ........ 40,000

Accumulated depreciationbuilding ......................... 40,000

To record depreciation on the equipment.
Depreciation expense (determined below) ......................... 15,775

Accumulated depreciationequipment ..................... 15,775
Equipment:
Machine 103 (determined above) $ 3,000
Machine 101:
Cost $70,000
Less: Accumulated depreciation 18,900
Book value, 12/31/12 51,100
Revised remaining life (7 years 3 years) 4 years 12,775
$15,775

Problem 1110
a. This is a change in estimate.
No entry is needed to record the change.
2013 adjusting entry:

Depreciation expense (determined below) ......................... 370,000
Accumulated depreciation .......................................... 370,000
$10,000,000
Cost
$250,000 Previous depreciation ($10,000,000 40 years)
x 3 yrs (750,000) Depreciation to date (20102012)
9,250,000 Undepreciated cost
25 yrs. Estimated remaining life (25 years: 20132037)
A disclosure note should describe the effect of a change in estimate on income

before extraordinary items, net income, and related per-share amounts for the current
period.

b. This is a change in accounting principle that is accounted for as a change in

estimate.
Depreciation expense (below) ...................... 21,000

Accumulated depreciation ............ 21,000
SYD
2009 depreciation $ 60,000 ($330,000 x 10/55)
2010 depreciation 54,000 ($330,000 x 9/55)
2011 depreciation 48,000 ($330,000 x 8/55)
2012 depreciation 42,000 ($330,000 x 7/55)
Accumulated depreciation $204,000
$330,000 Cost
204,000 Depreciation to date, SYD (above)
126,000 Undepreciated cost as of 1/1/13
0 Less residual value
126,000 Depreciable base
A disclosure note reports the effect of the change on net income and earnings
per share along with clear justification for changing depreciation methods.
c. This is a change in accounting principle accounted for as a change in estimate.
Because the change will be effective only for assets placed in service after the
date of change, depreciation schedules do not require revision because the change
does not affect assets depreciated in prior periods. A disclosure note still is required
to provide justification for the change and to report the effect of the change on current
years income.

Problem 1111
Requirement 1
Analysis:
Correct Incorrect
(Should Have Been Recorded) (As Recorded)
2011 Equipment 1,900,000 Equipment 2,000,000
Expense 100,000 Cash 2,000,000
Cash 2,000,000
2011 Expense 475,000 [1] Expense 500,000 [2]

Accum. deprec. 475,000 Accum. deprec. 500,000
2012 Expense 356,250 [3] Expense 375,000 [4]

Accum. deprec. 356,250 Accum. deprec. 375,000
[1] $1,900,000 x 25% (2 times the straight-line rate of 12.5%)

[2] $2,000,000 x 25%
[3] ($1,900,000 475,000) x 25%
[4] ($2,000,000 500,000 ) x 25%
During the two-year period, depreciation expense was overstated by $43,750,

but other expenses were understated by $100,000, so net income during the
period was overstated by $56,250, which means retained earnings is currently
overstated by that amount.
During the two-year period, accumulated depreciation was overstated, and

continues to be overstated by $43,750.
To correct incorrect accounts

Retained earnings ................................................. 56,250
Accumulated depreciation ................................................. 43,750
Equipment ........................................................ 100,000

Requirement 2
This is a change in accounting principle accounted for as a change in estimate.
No entry is needed to record the change.

Depreciation expense (determined below) .................. 178,125
Accumulated depreciation ...................................... 178,125
A change in depreciation method is considered a change in accounting estimate

resulting from a change in accounting principle. Accordingly, the Collins Corporation
reports the change prospectively; previous financial statements are not revised.
Instead, the company simply employs the straight-line method from now on. The
undepreciated cost remaining at the time of the change is depreciated straight line over
the remaining useful life.
Assets cost (after correction) $1,900,000

Accumulated depreciation to date ($475,000 + 356,250) (831,250)
Undepreciated cost, Jan. 1, 2013 1,068,750
Estimated residual value (0)
To be depreciated over remaining 6 years 1,068,750
6 years
Annual straight-line depreciation 20132018 $ 178,125

Problem 1112
Requirement 1
Plant and equipment:
Depreciation to date:
$150 million 10 years = $15 million per year x 3 years = $45 million
Book value: $150 million 45 million = $105 million
Patent:
Amortization to date:
$40 million 5 years = $8 million per year x 3 years = $24 million
Book value: $40 million 24 million = $16 million
Requirement 2
Property, plant, and equipment and finite-life intangible assets are tested for
impairment only when events or changes in circumstances indicate book value may
not be recoverable.
Requirement 3
Goodwill should be tested for impairment on an annual basis and in between
annual test dates if events or circumstances indicate that the fair value of the reporting
unit is below its book value. A company has the option of avoiding annual testing by
making qualitative evaluations of the likelihood of goodwill impairment to determine
if step one is necessary.
Requirement 4
Plant and equipment:
An impairment loss is indicated because the book value of the assets, $105
million, is greater than the $80 undiscounted sum of future cash flows. The amount of
the impairment loss is determined as follows:
Fair value (60) million
Patent:
There is no impairment loss because the undiscounted sum of future cash flows,
$20 million, exceeds book value of $16 million.

Goodwill:
An impairment loss is indicated because the book value of the assets of the
reporting unit, $470 million, is greater than the $450 million fair value of the reporting
unit. The amount of the impairment loss is determined as follows:

Fair value of Ellison Technology $450 million
Fair value of Ellisons net assets (excluding goodwill) (390) million

Implied value of goodwill (60) million

Problem 1113
Requirement 1
Hecalas cost of the mineral mine is $13,721,871, determined as follows:

Mining site $10,000,000
Development costs 3,200,000

Restoration costs 521,871
$13,721,871

$600,000 x 30% = $180,000
700,000 x 30% = 210,000
800,000 x 40% = 320,000
$710,000 x .73503* = $521,871
*Present value of $1, n = 4, i = 8%
Requirement 2
Depletion:
$13,721,871 800,000 tons = $17.1523 per ton
120,000 tons x $17.1523 = $2,058,276
Depreciation of machinery:
$140,000 10,000 = $.1625 per ton

800,000 tons
120,000 tons x $.1625 = $19,500
Depreciation of structures:
$68,000 800,000 tons = $.085 per ton
120,000 tons x $.085 = $10,200

Requirement 3
2013 accretion expense:
$521,871 x .08 x 8/12 = $27,833
Requirement 4
natural resources are part of product cost and therefore are included in the cost of the
inventory of the mineral, just as the depreciation on manufacturing equipment is
included in inventory cost. The depletion and depreciation are then included in cost of
goods sold in the income statement when the mineral is sold.
Requirement 5
A change in the service life of plant and equipment and finite-life intangible
assets is accounted for as a change in an estimate. The change is accounted for
prospectively by simply depreciating/depleting the remaining depreciable/depletable
base of the asset (book value at date of change less estimated residual value) over the
revised remaining service life (tons of ore in this case).
2014 Depletion:
Original cost $13,721,871

Less: 2013 depletion (2,058,276)
Remaining depletable cost $11,663,595
Revised estimate of tons
remaining (1,000,000 120,000) 880,000 tons
Depletion rate $13.2541 per ton
x Tons extracted 150,000 tons
2014 depletion $1,988,115

2014 Depreciation of machinery:
Original cost $140,000

Less: 2013 depreciation (19,500)
$120,500
Less: residual value (10,000)
Remaining depreciable cost $110,500
remaining (1,000,000 120,000) 880,000 tons
Depreciation rate $.1256 per ton
2014 Depreciation of structures:
Original cost $68,000

Less: 2013 depreciation (10,200)
Remaining depreciable cost $57,800
remaining (1,000,000 120,000) 880,000 tons
Depreciation rate $.0657 per ton

CASES
Analysis Case 111
The terms depreciation, depletion, and amortization all refer to the same process
of allocating the cost of property and equipment and finite-life intangible assets to the
periods benefited by their use. However, each term is applied to a different type of
long-lived asset; depreciation is used for plant and equipment, depletion for natural
resources, and amortization for intangibles.
There are differences in determining the factors necessary to calculate
depreciation, depletion, and amortization but the concepts involved are the same. The
service life of plant and equipment and natural resources is limited to physical life,
while the service life of intangible assets is limited to the assets legal or contractual
life, or 40 years, whichever is shorter.
The majority of companies use straight-line depreciation and straight-line
amortization. Natural resources usually are depleted using the units-of-production
method.

Communication Case 112
Suggested Grading Concepts and Grading Scheme:
Content (70%)
______ 50 Explains the concept of depreciation as a process of
cost allocation, not valuation.
____ Rational match versus market fluctuations.
____ Numerical example.
______ 10 Purpose of the balance sheet is to provide information about

financial position, not to directly measure company value.
______ 10 Purpose of the income statement is to provide cash flow

information, not to directly measure the change in company
value.
____
______ 70 points
Writing (30%)
______ 6 Terminology and tone appropriate to the audience of
a company president.
______ 12 Organization permits ease of understanding.

____ Introduction that states purpose.
____ Paragraphs that separate main points.
______ 12 English
____ Sentences grammatically clear and well organized,
concise.
____ Word selection.
____ Spelling.
____ Grammar and punctuation.
____
______ 30 points

Judgment Case 113
Requirement 1
Portland should have selected the straight-line depreciation method when
approximately the same amount of an assets service potential is used up each period.
If the reasons for the decline in service potential are unclear, then the selection of the
straight-line method could be influenced by the ease of recordkeeping, its use for
similar assets, and its use by others in the industry.
Requirement 2
a. By associating depreciation with a group of machines instead of each
individual machine, Portlands bookkeeping process is greatly simplified. Also, since
actual machine lives vary from the average depreciable life, unrecognized net losses
on early dispositions are expected to be offset by continuing depreciation on machines
usable beyond the average depreciable life. Periodic income does not fluctuate as a
result of recognizing gains and losses on machine dispositions.
b. Portland should divide the depreciable base of each machine by its estimated
life to obtain its annual depreciation. The sum of the individual annual depreciation
amounts should then be divided by the sum of the individual capitalized costs to
obtain the annual composite depreciation rate.

Judgment Case 114
Requirement 1
a. The capitalized cost for the computer includes all costs reasonable and
necessary to prepare it for its intended use. Examples of such costs are the purchase
price, delivery, installation, testing, and setup.
b. The objective of depreciation accounting is to allocate the depreciable base of
an asset over its estimated useful life in a systematic and rational manner. This
process matches the depreciable base of the asset with revenues generated from its
use. Depreciable base is the capitalized cost less its estimated residual value.
Requirement 2
The rationale for using accelerated depreciation methods is based on the
assumption that an asset is more productive in the earlier years of its estimated useful
life. Therefore, larger depreciation charges in the earlier years would be matched
against the larger revenues generated in the earlier years. An accelerated depreciation
method also would be appropriate when benefits derived from the asset are
approximately equal over the assets life, but repair and maintenance costs increase
significantly in later years. The early years record higher depreciation expense and
lower repairs and maintenance expense, while the later years have lower depreciation
and higher repairs and maintenance.
Judgment Case 115

There is no necessarily correct answer to the question. The support made for the
answer given is more important than the answer itself. Materiality is the critical
consideration.
Information is material if it can have an effect on a decision made by users. One
consequence of materiality is that GAAP needs to be followed only if an item is
material. The threshold for materiality will depend principally on the relative dollar
amount of the transaction.
In this case, is the $70,000 material? Net-of-tax income would be $49,000 higher
if the expenditures were capitalized instead of expensed [$70,000 x (1 .30)]. This
represents a 4.45% increase in income ($49,000 $1,100,000). The effect on the
balance sheet is small. Shareholders' equity would be higher by $49,000 if the
expenditures were capitalized. This represents an increase of less than one-half of one
percent. Would these differences have an effect on decision makers? There is no
single answer to this question. The FASB has been reluctant to establish any
quantitative materiality guidelines. The threshold for materiality has been left to
subjective judgment of the company preparing the financial statement and its auditors.

Communication Case 116
There is no right or wrong answer to this case. Both views, expense and
capitalize, can be defended once consideration is given to the materiality issue. The
process of developing and synthesizing the arguments will likely be more beneficial
than any single solution. Each student should benefit from participating in the
process, interacting first with his or her partner, then with the class as a whole. It is
important that each student actively participate in the process. Domination by one or
two individuals should be discouraged.
A significant benefit of this case is that it is forcing students to consider the
subjective nature of materiality when applying GAAP.

Integrating Case 117
Requirement 1
a. ($ in millions)
Inventory (understatement of 2014 beginning inventory) ......... 10
Retained earnings (understatement of 2013 income) ......... 10
Note: The 2012 error requires no adjustment because it has self-corrected by 2014.
b.
Retained earnings (20122013 patent amortization) ............. 6
Patent [($18 million 6 years) x 2]................................... 6
Patent amortization expense ($18 million 6 years) ......... 3
Patent ......................................................................... 3
c.
Depreciation expense (below) .......................................... 4
Accumulated depreciation ......................................... 4
($ in millions)
SYD
2012 depreciation $10 ($30 x 5/15)
2013 depreciation 8 ($30 x 4/15)
Accumulated depreciation $18
$30 Cost
18 Depreciation to date, SYD (above)
12 Undepreciated cost as of 1/1/14
0 Less residual value
12 Depreciable base
$ 4 New annual depreciation

Case 117 (concluded)
Requirement 2
Shareholders Net
Assets Liabilities Equity Income Expenses
2012 $640 $330 $310 $210 $150
2012 inventory (12) (12) (12) 12
Patent amortization (3) (3) (3) 3
Depreciation no adjustments to prior years
____ ____ ____ ____ ____
$625 $330 $295 $195 $165
2013 $820 $400 $420 $230 $175

2012 inventory 12 (12)
2013 inventory 10 10 10 (10)
Patent amortization (6) (6) (3) 3
Depreciation no adjustments to prior years
____ ____ ____ ____
____
$824 $400 $424 $249 $156

Judgment Case 118
Requirement 1
A change from the sum-of-the-years-digits method of depreciation to the
straight-line method for previously recorded assets is a change in accounting principle
that is accounted for as a change in estimate. Both the sum-of-the-years-digits
method and the straight-line method are generally accepted. A change in accounting
principle results from the adoption of a generally accepted accounting principle
different from the generally accepted principle used previously for reporting purposes.
Requirement 2
A change in the expected service life of an asset arising because of more
experience with the asset is a change in accounting estimate. A change in accounting
estimate occurs because future events and their effects cannot be perceived with
certainty. Estimates are an inherent part of the accounting process. Therefore,
accounting and reporting for certain financial statement elements requires the exercise
of judgment, subject to revision based on experience.

Research Case 119
Requirement 1
The reference locations for the impairment of property, plant, and equipment and
intangible assets include: FASB ASC 36010: Property, Plant and Equipment
Overall, and FASB ASC 35020: IntangiblesGoodwill and OtherGoodwill.
Requirement 2
Property, plant, and equipment and finite-life intangible assets are tested for
impairment only when events or changes in circumstances indicate book value may
not be recoverable.
Intangible assets with indefinite useful lives, including goodwill, should be tested
for impairment on an annual basis and in between annual test dates if events or
circumstances indicate that the fair value of the reporting unit is below its book value.
Goodwill, however, may first be qualitatively assessed to determine the likelihood that
fair value is less than book value before conducting step one of the goodwill
impairment test.
Requirement 3
Property, plant, and equipment and finite-life intangible assets:
Determining whether to record an impairment loss and actually recording the loss
is a two-step process. The first step is a recoverability testan impairment loss is
required only when the undiscounted sum of estimated future cash flows from an asset
is less than the assets book value. The measurement of impairment lossstep two
is the difference between the assets book value and its fair value.
Intangible assets with indefinite useful lives (other than goodwill):
The measurement of an impairment loss for indefinite-life intangible assets other
than goodwill is a one-step process. We compare the fair value of the asset with its
book value. If book value exceeds fair value, an impairment loss is recognized for the
difference.
Goodwill:
Determining whether to record an impairment loss and actually recording the loss
is a two-step process. Step 1: A goodwill impairment loss is indicated when the fair
value of the reporting unit is less than its book value. Step 2: A goodwill impairment
loss is measured as the excess of the book value of the goodwill over its implied fair
value. The implied fair value of goodwill is calculated in the same way that goodwill
is determined in a business combination. That is, its a residual amount measured by
subtracting the fair value of all identifiable net assets from the consideration
exchanged using the units previously determined fair value as the consideration
exchanged.
Requirement 4
Property, plant, and equipment and intangible assets to be sold should be
classified as held-for-sale in the period in which all of the following criteria are met:
a. Management, having the authority to approve the action, commits to a plan to
sell the asset.
b. The asset or asset group is available for immediate sale in its present condition.
c. An active program to locate a buyer and other actions required to complete the
plan to sell the asset or asset group have been initiated.
d. The sale is probable.
e. The asset or asset group is being actively marketed for sale at a price that is
reasonable in relation to its current fair value.
f. Actions required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn.
The specific reference for these criteria is FASB ASC 36010459.

Requirement 5
Property, plant, and equipment and intangible assets or groups of these assets
classified as held-for-sale is measured at the lower of its (a) book value or (b) fair
value less cost to sell. An impairment loss is recognized for any write-down to fair
value less cost to sell.

Ethics Case 1110
Requirement 1
2013 expense using CEO's approach:
$42,000,000 Cost
$4,200,000 Previous annual depreciation ($42,000,000 10 years)
x 2 years 8,400,000 Depreciation to date (20112012)
33,600,000 Book value
3 Estimated remaining life (20132015)
$11,200,000 New annual depreciation
2013 income would include only depreciation expense of $11,200,000.
2013 expense using Heather's approach:
$42,000,000 Cost
$4,200,000 Previous annual depreciation ($42,000,000 10 years)
x 2 years 8,400,000 Depreciation to date (20112012)
33,600,000 Book value
12,900,000 Write-down
20,700,000 New depreciable base
3 Estimated remaining life (20132015)
$ 6,900,000 New annual depreciation
2013 income would include depreciation expense of $6,900,000 and an asset write-
down of $12,900,000 for a total income reduction of $19,800,000.
Using Heather's approach, 2013's before tax income would be lower by $8,600,000
($19,800,000 11,200,000).

Requirement 2
Discussion should include these elements.
Facts:
GAAP provides guidance for recording impairment losses on partial write-downs
of property, plant, and equipment and intangible assets remaining in use. Assets
should be written down if there has been a significant impairment of value such as in
decreased product demand and full recovery of book value through use or resale is not
expected. Although the decision and computation to record an impairment loss often
is very subjective and difficult to measure, Heather is able to estimate an equipment
impairment of $12,900,000, presumably using the best information available. The
simple revision in service life approach is clearly an effort to enhance net income on
the part of the CEO.
Ethical Dilemma:
Is Heather's obligation to challenge the questionable application of revision in
service life more important than her obligation to her boss and to the company's effort
to reflect a favorable net income?
Who is affected?
Heather
CEO and other managers
Other employees
Shareholders
Potential shareholders
Creditors
Company auditors

Judgment Case 1111
Requirement 1
By changing its depreciation method, a company can shift reported income
between periods. For example, a shift from an accelerated method to the straight-line
method increases income in the year of the change. However, in some future period
or periods, income will be lower than it would have been if the change had not been
made.
This is not an effective way to manage earnings because the effect on income of
switching from one method to another must be disclosed.
Requirement 2
A company can manage earnings by changing the estimated useful lives of
depreciable assets. For example, reducing useful lives causes a decrease in income in
one or more years including the year of the change, and increases income in some
future years.
This is not an effective way to manage earnings because the effect on income of
changing useful lives, if material, must be disclosed.
Requirement 3
One possible approach to answering this question is to assume a company
overstates its impairment loss. For example, assume that the book value of
depreciable assets is $20 million. The fair value of these assets is estimated to be $13
million, indicating an impairment loss of $7 million. If these assets are written down
to $8 million, the company has effectively shifted $5 million in pre-tax income from
the current period to future periods. By writing down the assets to $8 million instead
of $13 million, future depreciation is $5 million less than it would have been with a
more appropriate write-down.

Judgment Case 1112
Transaction Disposition
1. Transaction is correctly recorded as repairs and maintenance
expense.
expense.
3. Transaction is incorrectly recorded. The amount should be
capitalized as part of the cost of the plant.
capitalized either as part of the cost of the plant or as a
reduction in the accumulated depreciation of the plant.
expense.
expense.
capitalized as equipment.
expense.

Real World Case 1113
Requirement 1
($ in millions)
Property, plant and equipment (Cost):
Balance, beginning of 2010 $24,221
Add: Acquisitions during 2010 2,586
Less: Balance end of 2010 (24,906)
Dispositions during 2010 $ 1,901
Property, plant, and equipment (Accumulated depreciation):

Balance, beginning of 2010 $ 11,835
Add: Depreciation for 2010 2,220
Less: Balance end of 2010 (12,367)
Accumulated depreciation of 2010 dispositions $ 1,688
Gain (loss) on 2010 dispositions:

Cost of dispositions $1,901
Less: Accumulated depreciation of dispositions (1,688)
Book value of dispositions $ 213
Proceeds from dispositions $1,469

Less: Book value of dispositions (213)
Gain on 2010 dispositions $1,256
Requirement 2
2010 depreciable assets:
Property, plant, and equipment $24,906

Less: Land (682)
Cost of depreciable assets $24,224
Assuming that Caterpillar uses the straight-line depreciation method,

$24,224 $2,220 (2010 depreciation) = 10.91 years.
The approximate average service life of Caterpillar's depreciable assets is 11 years.

Real World Case 1114
Requirement 3
The following was taken from the companys 2010 financial statements. Your
results could differ if the company changes any of its policies in years after 2010.
a. The company's depreciation and depletion policies, disclosed in Note 1.
Summary of Significant Account Policies, are as follows:
Depreciation and depletion of all capitalized costs of proved crude oil and
natural gas producing properties, except mineral interests, are expensed using
the unit-of-production method generally by individual field as the proved
developed reserves are produced. Depletion expenses for capitalized costs of
proved mineral interests are recognized using the unit-of-production method
by individual field as the related proved reserves are produced. Periodic
valuation provisions for impairment of capitalized costs of unproved mineral
interests are expensed.
Depreciation and depletion expenses for mining assets are determined using
the unit-of-production method as the proven reserves are produced. The
capitalized costs of all other plant and equipment are depreciated or amortized
over their estimated useful lives. In general, the declining-balance method is
used to depreciate plant and equipment in the United States; the straight-line
method generally is used to depreciate international plant and equipment and
to amortize all capitalized leased assets.
b. Expenditures for maintenance (including those for planned major maintenance

projects), repairs, and minor renewals to maintain facilities in operating
condition are generally expensed as incurred. Major replacements and
renewals are capitalized.

IFRS Case 1115
Requirement 2
GlaxoSmithKline values its property, plant, and equipment at cost less provision
for depreciation and impairment. IFRS also allows the valuation of these assets at fair
value (revaluation). If revaluation is chosen, all assets within a class of PP&E must be
revalued on a regular basis. U.S. GAAP does not allow the revaluation option.
Property, plant, and equipment must be valued at cost less accumulated depreciation
and impairment.
Requirement 3
For goodwill, impairments of goodwill are not reversed. U.S. GAAP also does
not allow for reversals of goodwill impairment.
Impairment losses on other noncurrent assets are only reversed if there has been a
change in estimates used to determine recoverable amounts and only to the extent that
the revised recoverable amounts do not exceed the carrying values that would have
existed, net of depreciation or amoritzation, had no impairments been recognized.
U.S. GAAP does not allow reversals of impairment losses.

Analysis Case 1116
Requirement 1
The statement of cash flows reports depreciation and amortization of $970
million.
Requirement 2
Dell uses the straight-line depreciation method over the estimated economic lives
of the assets, which range from 10 to 30 years for buildings and two to five years for
all other assets.

Air FranceKLM Case
Requirement 1
( in millions)
March 31, 2011 Before After
Flight equipment 18,486 x 12,000/11,040 = 20,093
Accumulated depreciation 7,446 x 12,000/11,040 = 8,093
Book value 11,040 x 12,000/11,040 = 12,000
The entry to revalue the flight equipment and the accumulated depreciation accounts
(and thus the book value) is:
Flight equipment (20,093 18,486) 1,607

Accumulated depreciation (8,093 7,446) 647
Revaluation surplusOCI (12,000 11,040) 960
Requirement 2
Under U.S. GAAP, property, plant, and equipment is valued at cost less
accumulated depreciation. U.S. GAAP prohibits revaluation.
Requirement 3
IFRS requires that each component of an item of property, plant, and equipment
must be depreciated separately if its cost is significant in relation to the total cost of
the item. AF uses this approach with its flight equipment. Note 3.13.2 states, Any
major airframes and engines (excluding parts with limited useful lives) are treated as a
separate asset component with the cost capitalized and depreciated over the period
between the date of acquisition and the next major overhaul.
In the United States, component depreciation is allowed but is not often used in
practice.

Air France-KLM Case (concluded)
Requirement 4
Per Note 3.14, fixed assets are tested for when there is an indication of
impairment.
This approach is similar to U.S. GAAP. However, under IFRS, assets must be
assessed for indicators of impairment at the end of each reporting period.
Requirement 5
In Note 3.14, AF states that the company deems the recoverable value of the asset
to be the higher of market value less cost of disposal and its value in use. The later is
determined according to the discounted future cash flow method. While not stated,
AF then compares the recoverable amount to book value. If book value is higher, an
impairment loss is recognized for the difference.
Under U.S. GAAP, the measurement of an impairment loss is a two-step process.
Step one, recoverability, requires an impairment loss to be recognized only when an
assets book value exceeds the undiscounted sum of the assets estimated future cash
flows. If a loss is required, step two measures the loss as the difference between book
value and fair value of the asset.
Requirement 6
( in millions)
Revaluation expense 13
Other intangible assets (373 360) 13


11sol 7e Final PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

11sol 7e Final PDF

Uploaded by

Copyright:

Available Formats

Chapter 11 Property, Plant, and Equipment and

Intangible Assets: Utilization and Impairment

AACSB assurance of learning standards in accounting and business education require

Questions AACSB Tags Exercises AACSB Tags

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

Sum-of-the-digits is ([4 (4 + 1)] 2) = 10

2013 $28,000 x 4/10 = $11,200

Straight-line rate is 25% (1 4 years) x 2 = 50% DDB rate

2013 $30,000 x 50% = $15,000

2013 2,200 hours x $2.80 = $6,160

The McGraw-Hill Companies, Inc., 2013

2013 $7,000 x 9/12 = $5,250

Sum-of-the-digits is ([4 (4 + 1)] 2) = 10

2013 $28,000 x 4/10 x 9/12 = $8,400

2014 $28,000 x 4/10 x 3/12 = $2,800

Straight-line rate is 25% (1 4 years) x 2 = 50% DDB rate

2013 $30,000 x 50% x 9/12 = $11,250

2014 $30,000 x 50% x 3/12 = $ 3,750

The McGraw-Hill Companies, Inc., 2013

($425,000 40,000) x 18% = $69,300

Journal entry (not required):

Cash ................................................................................ 35,000

Brief Exercise 115

Year 1 depletion = $2.75 x 700,000 feet = $1,925,000

The McGraw-Hill Companies, Inc., 2013

Goodwill is not amortized. In-process research and development is not

*Amortization of the developed technology:

Brief Exercise 117

The McGraw-Hill Companies, Inc., 2013

Assets cost $9,000,000

*$8,000,000 25 = $320,000 x 2 years = $640,000

The McGraw-Hill Companies, Inc., 2013

In this case, depreciation of $32,000 should have been $320,000 ($8,000,000

Retained earnings ............................................................ 288,000

Depreciation for 2013 would be $320,000.

Brief Exercise 1110

Brief Exercise 1111

Book value $26.5 million

Book value $26.5 million

Brief Exercise 1113

Determination of implied value of goodwill:

Measurement of impairment loss:

Brief Exercise 1114

The McGraw-Hill Companies, Inc., 2013

Book value $42 million

Brief Exercise 1116

Remodeling of offices, $22,000This is an example of an improvement. The

Rearrangement of the shipping and receiving area, $35,000This is an

Addition of a security system, $25,000This is an example of an addition.

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

Book Value Depreciation

Actual Depreciation Book Value

* Amount necessary to reduce book value to residual value

The McGraw-Hill Companies, Inc., 2013

Sum-of-the-digits is ([10 (10 + 1)] 2) = 55

2013 $110,000 x 10/55 = $20,000