ch11 Kieso IFRS4 SM

CHAPTER 11
Depreciation, Impairments, and Depletion
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief Concepts
Topics Questions Exercises Exercises Problems for Analysis
1. Depreciation methods; 1, 2, 3, 4, 5, 1, 2, 3, 4, 5, 1, 2, 3, 6, 1, 2, 3, 4
meaning of depreciation; 6, 10, 13, 19, 8, 14, 15 7, 8
choice of depreciation 20, 28
methods.
2. Computation of 7, 8, 9, 12, 1, 2, 3, 4, 1, 2, 3, 4, 5, 1, 2, 3, 4, 1, 2
depreciation. 28 5 6, 7, 8,10, 5, 6, 7, 8
12, 13, 14,
15
3. Depreciation base. 2, 7 5 8, 14, 18 1, 2, 3,5, 2

6
4. Errors; changes in 12 7 11, 12, 13, 3, 4 2

estimate. 14
5. Depreciation of partial 14 2, 3, 4 3, 4, 5, 6,7, 1, 2, 3,6,

periods. 15 7
6. Component depreciation. 11 6, 8 9, 16, 17
7. Impairment of value. 15, 16, 17, 9 18, 19, 20 9, 10

18
8. Depletion. 20, 21, 22, 10 21, 22, 23 11, 12

23, 24
9. Ratio analysis. 27 12 28
*10. Revaluation accounting. 25, 26, 28 11 24, 25, 26, 13, 14

27, 29
*This material is covered in an appendix to the chapter.
Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 11-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief Concepts
Learning Objectives Exercises Exercises Problems for Analysis
1. Describe depreciation concepts and 1, 2, 3, 4, 1, 2, 3, 4, 5, 1, 2, 3, 4, 1, 2, 3, 4

methods of depreciation. 5, 7, 8 6, 7, 8, 9, 10, 5, 6, 7, 8,
11, 12, 13, 12
14, 15
2. Identify other depreciation issues. 2, 3, 4, 6, 3, 4, 5, 6, 7, 1, 2, 3, 4, 2

7, 8 8, 9, 11, 12, 5, 6, 7, 8,
13, 14, 15, 12
16, 17
3. Explain the accounting issues 9 18, 19, 20 9, 10

related to asset impairment.
4. Discuss the accounting procedures 10 21, 22, 23 11, 12

for depletion of mineral resources.
5. Apply the accounting for 11 24, 25, 26, 5, 13, 14

revaluations. 27, 29
6. Demonstrate how to report and 12 28

analyze property, plant, equipment,
and mineral resources.
*7. Illustrate revaluation accounting 11 29 13, 14

procedures.
11-2 Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only)
ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Description Difficulty (minutes)
E11.1 Depreciation computations—SL, SYD, DDB. Simple 15–20
E11.2 Depreciation—conceptual understanding. Moderate 20–25
E11.3 Depreciation computations—SYD, DDB—partial periods. Simple 15–20
E11.4 Depreciation computations—five methods. Simple 15–25
E11.5 Depreciation computations—four methods. Simple 20–25
E11.6 Depreciation computations—five methods, partial periods. Moderate 20–30
E11.7 Different methods of depreciation. Simple 25–35
E11.8 Depreciation computation—replacement, non-monetary Moderate 20–25
exchange.
E11.9 Component depreciation. Simple 15–20
E11.10 Depreciation computations, SYD. Simple 10–15
E11.11 Depreciation—change in estimate. Simple 10–15
E11.12 Depreciation computation—addition, change in estimate. Simple 20–25
E11.13 Depreciation—replacement, change in estimate. Simple 15–20
E11.14 Error analysis and depreciation, SL and SYD. Moderate 20–25
E11.15 Depreciation for fractional periods. Moderate 25–35
E11.18 Impairment. Simple 10–15
E11.21 Depletion computations—oil. Simple 10–15
E11.22 Depletion computations—mining. Simple 15–20
E11.23 Depletion computations—minerals. Simple 15–20
E11.24 Revaluation accounting. Simple 10–15
E11.25 Revaluation accounting. Simple 10–15
E11.26 Revaluation accounting. Moderate 15–20
E11.27 Revaluation accounting. Moderate 10–15
E11.28 Ratio analysis. Moderate 15–20
*E11.29 Revaluation accounting. Moderate 20–25
P11.1 Depreciation for partial period—SL, SYD, and DDB. Simple 25–30
P11.2 Depreciation for partial periods—SL, Act., SYD, and DDB. Simple 25–35
P11.3 Depreciation—SYD, Act., SL, and DDB. Moderate 40–50
P11.4 Depreciation and error analysis. Complex 45–60
P11.5 Comprehensive property, plant, and equipment problem. Moderate 25–35
P11.6 Comprehensive depreciation computations. Complex 45–60
P11.7 Depreciation for partial periods—SL, Act., SYD, Moderate 30–35
and DDB.
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Level of Time
Item Description Difficulty (minutes)
P11.8 Depreciation methods. Moderate 25–35
P11.9 Impairment. Moderate 15–25
P11.10 Impairment. Moderate 30–35
P11.11 Mineral resources. Moderate 15–20
P11.12 Depletion and depreciation—mining. Moderate 25–30
*P11.13 Revaluations. Moderate 20–25
*P11.14 Revaluations. Moderate 25–35
CA11.1 Depreciation basic concepts. Moderate 25–35

CA11.2 Depreciation—strike, units-of-production, obsolescence. Moderate 25–35
CA11.3 Depreciation concepts. Moderate 25–35
CA11.4 Depreciation choice. Moderate 20–25
ANSWERS TO QUESTIONS
1. The differences among the terms depreciation, depletion, and amortization are that they imply a cost
allocation of different types of assets. Depreciation is employed to indicate that tangible plant assets
have decreased in carrying value. Where natural resources (or wasting assets such as petroleum
and minerals) are involved, the term depletion is used. The expiration of intangible assets such as
patents or copyrights is referred to as amortization.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
2. The factors relevant in determining the annual depreciation for a depreciable asset are the initial
recorded amount (cost), estimated residual value, estimated useful life, and depreciation method.
Assets are typically recorded at their acquisition cost, which is in most cases objectively
determinable. But cost assignment in other cases—“basket purchases” and the selection of an
implicit interest rate in asset acquisitions under deferred-payment plans—may be quite subjective,
involving considerable judgment.
The residual value is an estimate of an amount potentially realizable when the asset is retired from
service. The estimate is based on judgment and is affected by the length of the useful life of the
asset.
The useful life is also based on judgment. It involves selecting the “unit” of measure of service life
and estimating the number of such units embodied in the asset. Such units may be measured in
terms of time periods or in terms of activity (for example, years or machine hours). When selecting
the life, one should select the lower (shorter) of the physical life or the economic life. Physical life
involves wear and tear and casualties; economic life involves such things as technological
obsolescence and inadequacy.
Selecting the depreciation method is generally a judgment decision, but a method may be inherent in
the definition adopted for the units of service life, as discussed earlier. For example, if such units are
machine hours, the method is a function of the number of machine hours used during each period. A
method should be selected that will best measure the portion of services expiring each period. Once
a method is selected, it may be objectively applied by using a predetermined, objectively derived
formula.
3. Disagree. Accounting depreciation is defined as an accounting process of allocating the costs of

tangible assets to expense in a systematic and rational manner to the periods expected to benefit
from the use of the asset. Thus, depreciation is not a matter of valuation but a means of cost
allocation.
4. The carrying value of property, plant, and equipment is its cost less accumulated depreciation. If the
company estimates that the asset will have an unrealistically long life, periodic depreciation charges,
and hence accumulated depreciation, will be lower. As a result, the carrying value of the asset will be
higher.
5. A change in the amount of annual depreciation recorded does not change the facts about the decline
in economic usefulness. It merely changes reported figures. Depreciation in accounting consists of
allocating the cost of an asset over its useful life in a systematic and rational manner. Abnormal
obsolescence, as suggested by the plant manager, would justify more rapid depreciation, but
increasing the depreciation charge would not necessarily result in funds for replacement. It would not
increase revenue but simply make reported income lower than it would have been, thus preventing
overstatement of net income.
Questions Chapter 11 (Continued)
Recording depreciation on the books does not set aside any assets for eventual replacement of the
depreciated assets. Fund segregation can be accomplished but it requires additional managerial
action. Unless an increase in depreciation is accompanied by an increase in sales price of the
product, or unless it affects management’s decision on dividend policy, it does not affect funds.
Ordinarily higher depreciation will not lead to higher sales prices and thus to more rapid “recovery” of
the cost of the asset, and the economic factors present would have permitted this higher price
regardless of the excuse given or the particular rationalization used. The price could have been
increased without a higher depreciation charge.
The funds of a firm operating profitably do increase, but these may be used as working capital policy
may dictate. The measure of the increase in these funds from operations is not merely net income,
but that figure plus charges to operations which did not require working capital, less credits to
operations which did not create working capital. The fact that net income alone does not measure
the increase in funds from profitable operations leads some non-accountants to the erroneous
conclusion that a fund is being created and that the amount of depreciation recorded affects the fund
accumulation.
Acceleration of depreciation for purposes of income tax calculation stands in a slightly different
category, since this is not merely a matter of recordkeeping. Increased depreciation will tend to
postpone tax payments, and thus temporarily increase funds (although the liability for taxes may be
the same or even greater in the long run than it would have been) and generate gain to the firm to
the extent of the value of use of the extra funds.
6. Assets are retired for one of two reasons: physical factors or economic factors—or a combination of
both. Physical factors are the wear and tear, decay, and casualty factors which hinder the asset from
performing indefinitely. Economic factors can be interpreted to mean any other constraint that
develops to hinder the service life of an asset. Some accountants attempt to classify the economic
factors into three groups: inadequacy, supersession, and obsolescence. Inadequacy is defined
as a situation where an asset is no longer useful to a given enterprise because the demands of the
firm have increased. Supersession is defined as a situation where the replacement of an asset
occurs because another asset is more efficient and economical. Obsolescence is the catchall term
that encompasses all other situations and is sometimes referred to as the major concept when
economic factors are considered.
LO: 2, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. Before the amount of the depreciation charge can be computed, three basic questions must be
answered:
(1) What is the depreciation base to be used for the asset?
(2) What is the asset’s useful life?
(3) What method of cost apportionment is best for this asset?
LO: 1, 2, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
8. 2022 Depreciation Expense 2023 Depreciation Expense

Cost €800,000 Cost €800,000
Depreciation rate X .30* Depreciation for 2022 (240,000)
Depreciation for 2022 €240,000 Undepreciated cost in 2023 560,000
Depreciation rate X .30
2023 Accumulated Depreciation Depreciation for 2023 €168,000
2022 Depreciation €240,000
2023 Depreciation 168,000
Accumulated depreciation
at December 31, 2023 €408,000
*(1÷ 5) × 1.50
LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: AICPA PC: Problem Solving
9. Depreciation base:
Cost $162,000 Straight-line, $147,000 ÷ 20 = $ 7,350
Residual (15,000)
$147,000 Units-of-output, $147,000
× 20,000 = $35,000
84,000
Working hours, $147,000
× 14,300 = $50,050
42,000
Sum-of-the-years’-digits, $147,000 × 20/210* = $14,000
Double-declining-balance, $162,000 × .10** = $16,200
**(1 ÷ 20) × 2 = 10%

LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Measurement Analysis and Interpretation, AICPA PC:
Problem Solving
10. From a conceptual point of view, the method which gives the best measure of income. In other
words, the answer depends on the decline in the service potential of the asset. If the service
potential decline is faster in the earlier years, an accelerated method would seem to be more
desirable. On the other hand, if the decline is more uniform, perhaps a straight-line approach should
be used. Many firms adopt depreciation methods for more pragmatic reasons. Some companies use
accelerated methods for tax purposes but straight-line for book purposes because a higher net
income figure is shown on the books in the earlier years, but a lower tax is paid to the government.
Others attempt to use the same method for tax and accounting purposes because it eliminates some
recordkeeping costs. Tax policy sometimes also plays a role.
LO: 2 Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
11. Component depreciation involves depreciating separately each part of an item of property, plant, and
equipment that is significant to the total cost of the asset.
12. Original estimate: £2,500,000 ÷ 50 = £50,000 per year

Depreciation to January 1, 2023: £50,000 × 24 = £1,200,000
Depreciation in 2023 (£2,500,000 – £1,200,000) ÷ 15 years = £86,667 (Rounded)
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 5-10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Measurement Analysis and Interpretation, AICPA PC:
Problem Solving
13. No, depreciation does not provide cash; revenues do. The funds for the replacement of the assets
come from the revenues; without the revenues no income materializes and no cash inflow results. A
separate decision must be made by management to set aside cash to accumulate asset replacement
funds. Depreciation is added to net income on the statement of cash flows (indirect method) because
it is a noncash expense, not because it is a cash inflow.
14. 1.00 ÷ 4 = .25 straight-line rate × 2 = 50% double-declining rate

€8,000 × .50 = €4,000 Depreciation for first full year.
€4,000 × 6/12 = €2,000 Depreciation for half a year (first year), 2022.
(€8,000 - €2,000) = €6,000 × .50 = €3,000 Depreciation for 2023.
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 5-10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Measurement Analysis and Interpretation, AICPA PC:
Problem Solving
15. To determine whether an asset is impaired, on an annual basis, companies review the asset for
indicators of impairment – that is, a decline in the asset’s cash-generating ability through use or sale.
If the recoverable amount is less than the carrying amount, the asset has been impaired. The
impairment loss is measured as the amount by which the carrying amount exceeds the recoverable
amount of the asset. The recoverable amount of assets is defined as the higher of fair value less
costs to sell or value-in-use.
16. Under IFRS, impairment losses on plant assets may be restored as long as the write-up does not
result in a carrying amount greater than the carrying amount before impairment.
17. An impairment is deemed to have occurred if, in applying the impairment test, the carrying amount of
the asset exceeds the recoverable amount of the asset. In this case, the value-in-use of €705,000
exceeds the carrying amount of the equipment of €700,000 so no impairment is assumed to have
occurred; thus no measurement of the loss is made or recognized even though the fair value is
€590,000.
LO: 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
18. Impairment losses are reported as part of operating income generally in the “Other income and
expense” section. Impairment losses (and recovery of impairment losses) are similar to other costs
that would flow through operations. Thus, gains (recoveries of losses) on long-lived assets should be
reported as part of operating income in the “Other income and expense” section of the income
statement.
19. In a decision to replace or not to replace an asset, the undepreciated cost of the old asset is not a
factor to be considered. Therefore, the decision to replace plant assets should not be affected by the
amount of depreciation that has been recorded. The relative efficiency of new equipment as
compared with that presently in use, the cost of the new facilities, the availability of capital for the
new asset, etc., are the factors entering into the decision. Normally, the fact that the asset had been
fully depreciated through the use of some accelerated depreciation method, although the asset was
still in use, should not cause management to decide to replace the asset. If the new asset under
consideration for replacement was not any more efficient than the old, or if it cost a good deal more
in relationship to its efficiency, it is illogical for management to replace it merely because all or the
major portion of the cost had been charged off for tax and accounting purposes.
If depreciation rates were higher it might be true that a business would be financially more able to
replace assets, since during the earlier years of the asset’s use a larger portion of its cost would
have been charged to expense, and hence during this period a smaller amount of income tax paid.
By selling the old asset, which might result in a capital gain, and purchasing a new asset, the higher
depreciation charge might be continued for tax purposes. However, if the asset were traded in,
having taken higher depreciation could result in a lower basis for the new asset, if the exchange
lacks commercial substance.
It should be noted that expansion (not merely replacement) might be encouraged by increased
depreciation rates. Management might be encouraged to expand, believing that in the first few years
when they are reasonably sure that the expanded facilities will be profitable, they can charge off a
substantial portion of the cost as depreciation for tax purposes. Similarly, since a replacement
involves additional capital outlays, the tax treatment may have some influence.
Also, because of the inducement to expand or to start new businesses, there may be a tendency in
the economy as a whole for the accounting and tax treatment of the cost of plant assets to influence
the retirement of old plant assets.
It should be noted that to the extent that increased depreciation causes management to alter its
decision about replacement, it is not matching costs and revenues in the closest possible manner.
20. (a) Depreciation and cost depletion are similar in the accounting sense in that:
1. The cost of the asset is the starting point from which computation of the amount of the
periodic charge to operations is made.
2. The estimated life is based on economic or productive life.
3. The accumulated total of past charges to operations is deducted from the original cost of the
asset on the statement of financial position.
4. When output methods of computing depreciation charges are used, the formulas are
essentially the same as those used in computing depletion charges.
5. Both represent an apportionment of cost under the process of matching costs with revenue.
6. Assets subject to either are reported in the same classification on the balance sheet.
7. Appraisal values are sometimes used for depreciation while discovery values are sometimes
used for depletion.
8. Residual value is properly recognized in computing the charge to operations.
9. They may be included in inventory if the related asset contributed to the production of the
inventory.
10. The rates may be changed upon revision of the estimated productive life used in the original
rate computations.
(b) Depreciation and cost depletion are dissimilar in the accounting sense in that:
1. Depletion is almost always based on output whereas depreciation is usually based on time.
2. Many formulas are used in computing depreciation but only one is used to any extent in
computing depletion.
3. Depletion applies to mineral resources while depreciation applies to plant and equipment.
4. Depletion refers to the physical exhaustion or consumption of the asset while depreciation
refers to the wear, tear, and obsolescence of the asset.
5. Under statutes which base the legality of dividends on accumulated earnings, depreciation is
usually a required deduction, but depletion is usually not a required deduction.
6. The computation of the depletion rate is usually much less precise than the computation of
depreciation rates because of the greater uncertainty in estimating the productive life.
7. A difference that is temporary in nature arises from the timing of the recognition of depreciation
under conventional accounting and under tax laws, and it results in the recording of deferred
income taxes. On the other hand, the difference between cost depletion under conventional
accounting and its counterpart, percentage depletion, under the tax laws is permanent and does
not require the recording of deferred income taxes.
LO: 1, 4, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
21. Cost depletion is the procedure by which the capitalized costs, less residual land values, of a natural
resource are systematically charged to operations. The purpose of this procedure is to match the
cost of the resource with the revenue it generates. The usual method is to divide the total cost less
residual value by the estimated number of recoverable units to arrive at a depletion charge for each
unit removed. A change in the estimate of recoverable units will necessitate a revision of the unit
charge.
22. Exploration costs include expenditures for topographical and geophysical study exploratory drilling
and activities to evaluate the technical feasibility of extracting a mineral resource. Development costs
are exploration costs reclassified once technical feasibility and commercial viability of production are
demonstrated.
23. The maximum dividend permissible is the amount of accumulated net income (after depletion) plus
the amount of depletion charged. This practice can be justified for companies that expect to extract
natural resources and not purchase additional properties. In effect, such companies are distributing
gradually to stockholders their original investments.
24. Using full-cost accounting, the cost of unsuccessful ventures as well as those that are successful are
capitalized, because a cost of drilling a dry hole is a cost that is needed to find the commercially
profitable wells. Successful efforts accounting capitalizes only those costs related to successful
projects. They contend that to measure cost and effort accurately for a single property unit, the only
measure is in terms of the cost directly related to that unit. In addition, it is argued that full-cost is
misleading because capitalizing all costs will make an unsuccessful company over a short period of
time show no less income than does one that is successful.
25. The land should be reported on the statement of financial position at ¥20,000,000 and an unrealized
gain of ¥5,000,000 (¥20,000,000 – ¥15,000,000) is reported as other comprehensive income in the
statement of comprehensive income.
LO: 5, 6, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
26. A major reason most companies do not use revaluation accounting is the substantial and continuing
costs associated with appraisals to determine fair value. In addition, losses associated with
revaluation below historical cost decrease net income, while gains are not recorded in income.
However, revaluation increases result in higher depreciation expense and lower income.
27. Asset turnover:
£42
= .30 times
£140
Rate of return on assets:
£2.8
= 2.0%
£140
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 5-10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
*28. Mandive makes the following journal entries in year 1, assuming straight-line depreciation.
Depreciation Expense................................................................................. 100,000

Accumulated Depreciation—Plant Assets........................................ 100,000
To record depreciation expense in year 1
Accumulated Depreciation—Plant Assets................................................... 100,000

Plant Assets..................................................................................... 40,000
Unrealized Gain on Revaluation—Equipment.................................. 60,000
To adjust the plant assets to fair value and record unrealized gain
Thus, there is a 2-step process. First, record depreciation based on the cost of $400,000. As a result,
depreciation expense of $100,000 ($400,000 ÷ 4) is reported on the income statement. Secondly,
the revaluation of $60,000 which is the difference between the fair value of $360,000 and the book
value of $300,000 is recorded.
Note to Instructor: The unrealized gain is reported in equity as a component of other comprehensive
income. Mandive now reports the following information at the end of year 1 for its plant assets:
Plant Assets ($400,000 – $40,000)............................................................. $360,000

Accumulated depreciation—Plant assets................................................... –0–
Book value.................................................................................................. $360,000
Unrealized gain on revaluation................................................................... $ 60,000
As indicated, $360,000 is the new basis of the asset. Depreciation expense of $100,000 is reported in
the income statement and $60,000 is reported in other comprehensive income. The $60,000 of other
comprehensive income then is also reported as an unrealized gain in the statement of financial
position. Assuming no change in the useful life, depreciation in year 2 will be $120,000 ($360,000 ÷ 3).
LO: 7, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11.1
($50,000 – $2,000) × 23,000

2022: = $6,900
160,000
($50,000 – $2,000) × 31,000

2023: = $9,300
160,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None
BRIEF EXERCISE 11.2
€80,000 – €8,000
(a) = €9,000
8
€80,000 – €8,000
(b) × 4/12 = €3,000
8
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 5-10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None
BRIEF EXERCISE 11.3
(a) (€80,000 – €8,000) × 8/36* = €16,000
(b) [(€80,000 – €8,000) × 8/36] × 9/12 = €12,000
*[8(8 + 1)] ÷ 2
BRIEF EXERCISE 11.4
(a) €80,000 × .25* = €20,000
(b) (€80,000 × .25) × 3/12 = €5,000
*(1/8 × 2)
BRIEF EXERCISE 11.5
Depreciable Base = ($28,000 + $200 + $125 + $500 + $475) – $3,000 = $26,300.

BRIEF EXERCISE 11.6
Component Depreciation Expense

A (R$70,000 – R$7,000)/10 = R$ 6,300
B (R$50,000 – R$5,000)/5 = 9,000
C (R$82,000 – R$4,000)/12 = 6,500
R$21,800
BRIEF EXERCISE 11.7
Annual depreciation expense: (£8,000 – £1,000)/5 = £1,400

Book value, 1/1/23: £8,000 – (2 × £1,400) = £5,200
Depreciation expense, 2023: (£5,200 – £500)/2 = £2,350
BRIEF EXERCISE 11.8
Component Depreciation Expense

Building (HK$11,000,000 – 0) ÷ 40 = HK$275,000
15-year property (HK$ 150,000 – 0) ÷ 15 = 10,000
5-year property (HK$ 150,000 – 0) ÷ 5 = 30,000
HK$315,000
BRIEF EXERCISE 11.9
Impairment test:
Present value of future net cash flows* ($500,000) < Carrying amount
($520,000**); therefore, the asset has been impaired.
*Used as recoverable amount because it is greater than fair value less costs to sell.
**$900,000 – $380,000
Journal entry:
Loss on Impairment................................................ 20,000
Accumulated Depreciation—Machinery
($520,000 – $500,000)................................... 20,000
BRIEF EXERCISE 11.10
Inventory............................................................................ 73,500
Accumulated Depletion........................................... 73,500
$400,000 + $100,000 + $80,000 – $160,000

= $105 per ton
4,000
700 × $105 = $73,500

(a) Accumulated Depreciation—Equipment....... 100,000,000

Equipment........................................................ 150,000,000
Unrealized Gain on Revaluation-Equip.*. . 250,000,000
*[¥650,000,000 – (¥500,000,000 – ¥100,000,000)]
(b) Depreciation Expense [(¥650,000,000 – 0) ÷ 4]... 162,500,000

Accumulated Depreciation—
Equipment................................................ 162,500,000
(a) Asset turnover:

$7,867
= 1.109 times
$7,745 + $6,445
2
(b) Profit margin on sales:

$854
= 10.86%
$7,867
(c) Return on assets:
1. 1.109 × .1086 = 12.04%
2. $854
= 12.04%
$7,745 + $6,445
2
SOLUTIONS TO EXERCISES
EXERCISE 11.1 (15–20 minutes)
(a) Straight-line method depreciation for each of Years 1 through 3 =

£518,000 – £50,000
= £39,000
12
12 × (12+1)
(b) Sum-of-the-Years’-Digits = = 78
2
12/78 × (£518,000 – £50,000) = £72,000 depreciation Year 1

(c) Double-Declining-Balance method 1.00

× 2 = 16.67%
depreciation rate. 12
£518,000 × .1667 = £86,351 depreciation Year 1

(£518,000 – £86,351) × .1667 = £71,956 depreciation Year 2
(£518,000 – £86,351 – £71,956) × .1667 = £59,961 depreciation Year 3
(a) If there is any residual value and the amount is unknown (as is the case
here), the cost would have to be determined by looking at the data for
the double-declining balance method.
1.00
= 20%; .20 × 2 = 40%
5
Cost × .40 = $20,000

$20,000 ÷ .40 = $50,000 Cost of asset
EXERCISE 11.2 (Continued)
(b) $50,000 cost [from (a)] – $45,000 total depreciation = $5,000 residual
value.
(c) The highest charge to income for Year 1 will be yielded by the double-
declining-balance method.
(d) The highest charge to income for Year 4 will be yielded by the straight-
line method.
(e) The method that produces the highest book value at the end of Year 3
would be the method that yields the lowest accumulated depreciation at
the end of Year 3, which is the straight-line method.
Computations:
St.-line = $50,000 – ($9,000 + $9,000 + $9,000) = $23,000 book value, end
of Year 3.
S.Y.D. = $50,000 – ($15,000 + $12,000 + $9,000) = $14,000 book value,
end of Year 3.
D.D.B. = $50,000 – ($20,000 + $12,000 + $7,200) = $10,800 book value,
end of Year 3.
(f) The method that will yield the highest gain (or lowest loss) if the asset
is sold at the end of Year 3 is the method which will yield the lowest
book value at the end of Year 3, which is the double-declining balance
method in this case as shown in (e) above.
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None
20 (20 + 1)
(a) = 210
2
3/4 × 20/210 × (€774,000 – €60,000) = €51,000 for 2022
1/4 × 20/210 × (€774,000 – €60,000) = €17,000

+ 3/4 × 19/210 × (€774,000 – €60,000) = 48,450
€65,450 for 2023
1.00
(b) = 5%; .05 × 2 = 10%
20
3/4 × .10 × €774,000 = €58,050 for 2022
.10 × (€774,000 – €58,050) = €71,595 for 2023

(a) $279,000 – $15,000 = $264,000*; $264,000 ÷ 10 yrs. = $26,400
(b) $264,000* ÷ 240,000 units = $1.10; 25,500 units × $1.10 = $28,050
(c) $264,000* ÷ 25,000 hours = $10.56 per hr.; 2,650 hrs. × $10.56 = $27,984
n(n + 1) 10(11)
(d) 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 OR = = 55
2 2
10
× $264,000* × 4/12 = $16,000
55
9
× $264,000 × 8/12 = 28,800
55
Total for 2023 $44,800

*Depreciable base = Cost – Residual value
(e) $279,000 × [(1.00 ÷ 10) × 2] × 4/12 = $18,600
[$279,000 – ($279,000 × .20)] × .20 × 8/12 = 29,760
Total for 2023 $48,360
[May also be computed as .20 × [($279,000 – (8/12 × .20 × $279,000)]

(€150,000 – €24,000)
(a) = €25,200/yr. = €25,200 × 5/12 = €10,500
5
2022 Depreciation—Straight line = €10,500
(€150,000 – €24,000)
(b) = €6.00/hr.
21,000
2023 Depreciation—Machine Usage = 800 × €6.00 = €4,800
(c) Machine Allocated to

Year Total 2022 2023
1 5/15^ × €126,000 = €42,000 €17,500* €24,500**
2 4/15^ × €126,000 = €33,600 14,000***
€17,500 €38,500
* €42,000 × 5/12 = €17,500
** €42,000 × 7/12 = €24,500
*** €33,600 × 5/12 = €14,000
^1+2+3+4+5 or [5 × (5+1)] ÷ 2
2023 Depreciation—Sum-of-the-Years’-Digits = €38,500
(d) 2022 *.40 × (€150,000) × 5/12 = €25,000
2023 *.40 × (€150,000 – €25,000) = €50,000
OR
1st full year (*.40 × €150,000) = €60,000
2nd full year [*.40 × (€150,000 – €60,000)] = €36,000

*[(1.00 ÷ 5) × 2]
2022 Depreciation = 5/12 × €60,000 = €25,000
2023 Depreciation = 7/12 × €60,000 = €35,000

5/12 × €36,000 = 15,000
€50,000
$304,000 – $16,000
(a) 2022 Straight-line = $36,000/year
8
3 months—Depreciation ($36,000 × 3/12) = $9,000
$304,000 – $16,000
(b) 2022 Output = $7.20/output unit
40,000
1,000 units × $7.20 = $7,200
$304,000 – $16,000
(c) 2022 Working hours = $14.40/hour
20,000
525 hours × $14.40 = $7,560
n(n + 1) 8(9)
(d) 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36 OR = = 36
2 2
Allocated to
Sum-of-the-years’-digits Total 2022 2023 2024
Year 1 8/36 × $288,000* = $64,000 $16,000 (3/12) $48,000 (9/12)
2 7/36 × $288,000* = $56,000 14,000 (3/12) $42,000 (9/12)
3 6/36 × $288,000* = $48,000 12,000 (3/12)
*($304,000 - $16,000) $16,000 $62,000 $54,000
2024: $54,000 = (9/12 of 2nd year of machine’s life plus 3/12 of 3 rd year
of machine’s life)
(e) Double-declining-balance 2023: [(1.00 ÷ 8) × 2] = 25%.
2022: .25 × $304,000 × 3/12 = $19,000
2023: .25 × ($304,000 – $19,000) = $71,250
OR
1st full year (.25 × $304,000) = $76,000
2nd full year [.25 × ($304,000 – $76,000)] = $57,000
2022 Depreciation 3/12 × $76,000 = $19,000
2023 Depreciation 9/12 × $76,000 = $57,000

3/12 × $57,000 = 14,250
$71,250
LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None
Methods of Depreciation
Date Accum. Depr.
Description Purchased Cost Residual Life Method to 2022 2023 Depr.
A 2/12/21 $159,000 $16,000 10 (a) SYD $37,700 (b) $22,100
B 8/15/20 (c) 79,000 21,000 5 SL 29,000 (d) 11,600
C 7/21/19 88,000 28,500 8 DDB (e) 55,516 (f) 3,984
D (g) 10/12/21 219,000 69,000 5 SYD 70,000 (h) 35,000
Machine A—Testing the methods

(a) Straight-Line Method for 2021 $ 7,150 [($159,000 – $16,000) ÷ 10] × 1/2
Straight-Line Method for 2022 $14,300
Total Straight Line $21,450
Double-Declining-Balance for 2021 $15,900 ($159,000 × .2* × 1/2)
Double-Declining-Balance for 2022 $28,620 [($159,000 – $15,900) × .2*]
Total Double Declining Balance $44,520
*[(1.00 ÷10) × 2]
Sum-of-the-Years-Digits for 2021 $13,000 [($159,000 – $16,000) × 10/55**
× 1/2]
Sum-of-the-Years-Digits for 2022 $24,700 ($143,000 × 10/55** × 1/2) +
($143,000 × 9/55** × 1/2)
Total Sum-of-the-Years-Digits $37,700
**[10 × (10 + 1)] ÷ 2
Method used must be SYD
(b) Using SYD, 2023 Depreciation is $22,100 ($143,000 × 9/55* × 1/2) +

($143,000 × 8/55* × 1/2)
Machine B—Computation of the cost

(c) Asset has been depreciated for 2 1/2 years using the straight-line
method.
Annual depreciation is then equal to $29,000 divided by 2 1/2 or $11,600.

11,600 times 5 plus the residual value is equal to the cost.
Cost is $79,000 [($11,600 × 5) + $21,000].
(d) Using SL, 2023 Depreciation is $11,600.
Machine C—Using the double-declining-balance method of depreciation

(e) 2019’s depreciation is $11,000 ($88,000 × .25* × .5)
2020’s depreciation is $19,250 ($88,000 – $11,000) × .25*
Accumulated Depreciation
at 12/31/22 $55,516 *[(1.00 ÷ 8) × 2]
(f) Using DDB, 2023 Depreciation is limited to $3,984, which results in the
carrying value of the machine equal to the residual value.
($88,000 – $28,500 - $55,516)
Machine D—Computation of Year Purchased

(g) First Half Year using SYD = $25,000 [($219,000 – $69,000) ×
5/15** × .5]
Second Year using SYD = $45,000 ($150,000 × 5/15** × .5) +
($150,000 × 4/15** × .5)
**[5 × (5+1)] ÷ 2 $70,000
Thus, the asset must have been purchased on October 12, 2021
(h) Using SYD, 2023 Depreciation is $35,000 ($150,000*** × 4/15 × .5) +

($150,000*** × 3/15 × .5)
***($219,000 – $69,000)
Old Machine
June 1, 2020 Purchase....................................... €31,800

Freight........................................... 200
Installation..................................... 500
Total cost............................. €32,500
Annual depreciation charge: (€32,500 – €2,500) ÷ 10 = €3,000
On June 1, 2021, debit the old machine for €2,700 and reduce the book
value by €900; the revised total cost is €34,300 (€32,500 + €2,700 – €900);
thus the revised annual depreciation charge is: (€34,300 – €2,500 –
€3,000) ÷ 9 = €3,200.
Book value, old machine, June 1, 2024:

[€34,300 – €3,000 – (€3,200 × 3)] =................................ € 21,700
Fair value........................................................................... (20,000)
Loss on exchange............................................................ 1,700
Cost of removal................................................................ 75
Total loss.................................................................. € 1,775
(Note to instructor: The above computation is done to determine whether

there is a gain or loss from the exchange of the old machine with the new
machine and to show how the cost of removal might be reported.
New Machine
Basis of new machine Cash paid (€35,000 – €20,000) €15,000
Fair value of old machine 20,000
Installation cost 1,500
Total cost of new machine €36,500
Depreciation for the year beginning June 1, 2024 = (€36,500 – €4,000) ÷ 10 =

€3,250.
(a) Estimated Depreciable Estimated Depreciation

Component Cost Residual Cost Life per Year
A ¥ 40,500 ¥ 5,500 ¥ 35,000 10 ¥ 3,500
B 33,600 4,800 28,800 9 3,200
C 36,000 3,600 32,400 8 4,050
D 19,000 1,500 17,500 7 2,500
E 23,500 2,500 21,000 6 3,500
¥152,600 ¥17,900 ¥134,700 ¥16,750
Depreciation Expense......................................................
16,750
Accumulated Depreciation—Equipment............... 16,750
(b) Equipment.........................................................................
40,000
Accumulated Depreciation—Equipment........................ 19,200*
Loss on Disposal of Equipment...................................... 14,400**
Equipment................................................................ 33,600
Cash.......................................................................... 40,000
*¥3,200 × 6 = ¥19,200
**¥33,600 – ¥19,200
8 × (8 + 1)
Sum-of-the-years’-digits = = 36
2
Using Y to stand for the years of remaining life:

Y/36 × (₺502,000 – ₺70,000) = ₺60,000
Multiplying both sides by 36:
₺432,000 X Y = ₺2,160,000
Y = ₺2,160,000 ÷ ₺432,000
Y=5
The year in which there are five remaining years of life at the beginning of
that given year is 2022.
(a) No correcting entry is necessary because changes in estimate are

handled in the current and prospective periods.
(b) Revised annual charge

Book value as of 1/1/2024 [$52,000 – (*$6,000 × 5)] = $22,000
Remaining useful life, 5 years (10 years – 5 years)
Revised residual value, $4,500
($22,000 – $4,500) ÷ 5 = $3,500
Depreciation Expense......................................................3,500
*($52,000 – $4,000) ÷ 8 = $6,000 annual depreciation 2018 - 2022

(a) 1996–2005—(€1,900,000 – €60,000) ÷ 40 = €46,000/yr.
(b) 2006–2023—Building (€1,900,000 – €60,000) ÷ 40 = €46,000/yr.

Addition (€470,000 – €20,000) ÷ 30 = 15,000/yr.
€61,000/yr.
(c) No adjusting entry required.
(d) Revised annual depreciation

Building
Book value: (€1,900,000 – €1,288,000*)............... €612,000
Residual value........................................................ (60,000)
552,000
Remaining useful life............................................. ÷ 32 years
Annual depreciation............................................... € 17,250
*€46,000 × *28 years = €1,288,000 *(10 + 18)
Addition
Book value: (€470,000 – €270,000**).................... €200,000
Residual value........................................................ (20,000)
180,000
Remaining useful life............................................. ÷ 32 years
Annual depreciation............................................... € 5,625
**€15,000 × 18 years = €270,000
Annual depreciation expense—building (€17,250 + €5,625) €22,875

(a) $2,400,000 ÷ 40 = $60,000
(b) Loss on Disposal of Plant Assets................................... 90,000

Accumulated Depreciation—Buildings
($180,000 × 20/40)..........................................................
90,000
Buildings.................................................................. 180,000
Buildings...........................................................................
300,000
Cash.......................................................................... 300,000
Note: The most appropriate entry would be to remove the old roof and
record a loss on disposal, because the cost of the old roof is given.
Another alternative would be to debit Accumulated Depreciation on the
theory that the replacement extends the useful life of the building. The
entry in this case would be as follows:
Accumulated Depreciation—Buildings........................... 300,000

Cash.......................................................................... 300,000
As indicated, this approach is not as appropriate as the first approach.
(c) No entry necessary.
(d) (Assume the cost of the old roof is removed)

Building ($2,400,000 – $180,000 + $300,000)......................... $2,520,000
Accumulated Depreciation ($60,000 × 20 – $90,000)............ (1,110,000)
Book value 1,410,000
Remaining useful life............................................................... ÷ 25 years
Depreciation—2023 ................................................................. $ 56,400
Note to Instructor:
If it is assumed that the cost of the new roof is
debited to Accumulated Depreciation:
Book value of the building prior to the replacement
of roof $2,400,000 – ($60,000 × 20) =................................... $1,200,000
Cost of new roof....................................................................... 300,000
$1,500,000
Remaining useful life............................................................... ÷ 25 years
Depreciation—2023 ................................................................. $ 60,000
(a) Maintenance and Repairs Expense.................................500

Equipment................................................................ 500
(b) The proper ending balance in the asset account is:

January 1 balance....................................... ¥133,000
Add: New equipment:
Purchases.............................................. ¥32,000
Freight.................................................... 700
Installation............................................. 2,500
35,200
Less: Cost of equipment sold.................. 23,000
December 31 balance................................. ¥145,200
(1) Straight-line: ¥145,200 ÷ 10 = ¥14,520
(2) Sum-of-the-years’-digits: 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55
n(n + 1) 10(11)
OR = = 55
2 2
For equipment purchased in 2021: ¥110,000 (¥133,000 – ¥23,000) of the

cost of equipment purchased in 2021, is still on hand.
8/55 × ¥110,000 =........................................................ ¥16,000
For equipment purchased in 2023: 10/55 × ¥35,200 =...... 6,400
Total............................................................................. ¥22,400
(a) 2018–2023
2017 Incl. 2024 Total
(1) $240,000 – $21,000 = $219,000
$219,000 ÷ 12 = $18,250
per yr. ($50 per day)
133*/365 of $18,250 = $ 6,650
2018–2023 Include. (6 × $18,250) $109,500
68**/365 of $18,250 = $ 3,400 $119,550
(2) 0 109,500 18,250 127,750
(3) 18,250 109,500 0 127,750
(4) 9,125 109,500 9,125 127,750
(5) 4/12 of $18,250 6,083
2014–2019 Inc. 109,500
3/12 of $18,250 4,563 120,146
(6) 0 109,500 0 109,500
*(11 + 30 + 31 + 30 + 31) **(31 + 28 + 9)
(b) The most accurate distribution of cost is given by methods 1 and 5 if it
is assumed that straight-line depreciation is satisfactory. Reasonable
accuracy is normally given by 2, 3, or 4. The simplest of the applica-
tions are 6, 2, 3, 4, 5, and 1, in about that order. Methods 2, 3, and 4
combine reasonable accuracy with simplicity of application.
(a) [(€6,000 + €10,000 + €34,000) – 0] ÷ 10 = €5,000
(b) Component Depreciation Expense

Tires (€ 6,000 – 0) ÷ 2 = €3,000
Transmission (€10,000 – 0) ÷ 5 = 2,000
Tractor (€34,000 – 0) ÷ 10 = 3,400
€8,400
(c) A company would want to use component depreciation if it believed this

method produced more accurate results.
(a) Component Depreciation Expense

Building structure €4,200,000 ÷ 60 = € 70,000
Building engineering 2,100,000 ÷ 30 = 70,000
Building external works 700,000 ÷ 30 = 23,333
€163,333
(b) Building Engineering....................................... 2,300,000

Accumulated Depreciation—Building
Engineering (€2,100,000 × 20/30)................ 1,400,000
Loss on Disposal of Plant Assets................... 700,000
Building Engineering............................ 2,100,000
Cash....................................................... 2,300,000
(a) December 31, 2022

Loss on Impairment..........................................................
1,000,000
Accumulated Depreciation—Equipment............... 1,000,000
Cost................................................. €9,000,000
Accumulated depreciation............ (1,000,000)
Carrying amount............................ 8,000,000
Recoverable amount*.................... (7,000,000)
Loss on impairment....................... €1,000,000
*Larger of value in use and fair value less cost of disposal.
(b) December 31, 2023

Depreciation Expense......................................................
1,750,000
New carrying amount.................... €7,000,000

Useful life........................................ ÷ 4 years
Depreciation per year.................... €1,750,000
(c) Accumulated Depreciation—Equipment............. 750,000

Recovery of Impairment Loss..................... 750,000
(€6,000,000 – [€7,000,000 – €1,750,000])
(a) Loss on Impairment..........................................................

3,600,000
Cost................................................. €9,000,000
Accumulated depreciation............ (1,000,000)
Carrying amount............................ 8,000,000
Less: Recoverable amount.......... 4,400,000
Loss on impairment....................... €3,600,000
(b) No entry necessary. Depreciation is not taken on assets intended to be

sold.
(c) Accumulated Depreciation—Equipment....... 680,000
Recovery of Impairment Loss............... 680,000
Fair value.......................................................... €5,100,000
Less: Cost of disposal................................... 20,000 5,080,000
Carrying amount.............................................. (4,400,000*)
Recovery of impairment loss......................... € 680,000
*(€9,000,000 – €1,000,000 – €3,600,000)

Loss on Impairment..........................................................
200,000
Cost................................................. $900,000
Accumulated depreciation............ (400,000)
Carrying amount............................ 500,000
Recoverable amount...................... (300,000*)
Loss on impairment....................... $200,000
*Use $300,000 (value-in-use) because it is greater than fair value less

cost of disposal.
(b) It should be reported in the other income and expense section in the
income statement.
(c) Accumulated Depreciation—Equipment................. 45,000
Recovery of Impairment Loss
[$270,000 – ($300,000 – $75,000*)]................... 45,000
* ($300,000 ÷ 4) = $75,000 annual depreciation
(d) To determine whether an asset is impaired, on an annual basis,

companies review the asset for indicators of impairment—that is, a
decline in the asset’s cash-generating ability through use or sale. If
impairment indicators are present, then the company compares the
asset’s recoverable amount with its carrying amount. If the carrying
amount is higher than the recoverable amount, the difference is an
impairment loss. Recoverable amount is defined as the higher of fair
value less costs to sell or value-in-use.
Cost per barrel of oil:
€600,000
Initial payment = = €2.40
250,000
€31,500
Rental = = 1.75
18,000
Premium, .05 X €65 = 3.25
€30,000
Reconditioning of land = = .12
250,000
Total cost per barrel €7.52
Depletion base: €1,250,000 + €90,000 – €100,000 + €200,000 = €1,440,000
Depletion rate: €1,440,000 ÷ 60,000 = €24/ton
(a) Per unit mineral cost: €24/ton

(b) 12/31/22 inventory: €24 × *6,000 tons = €144,000
(c) Cost of goods sold 2022: €24 × 24,000 tons = €576,000
*(30,000 – 24,000)
$850,000 + $170,000 + $40,000* – $100,000 = $.08 depletion per unit

(a)
12,000,000
*Note to instructor: The $40,000 should be depleted because it is an

environmental liability provision.
2,500,000 units extracted × $.08 = $200,000 depletion for 2022
(b) 2,200,000 units sold × $.08 = $176,000 charged to cost of goods sold for
2022
During 2022
Land............................................................................ 300,000
Cash.................................................................... 300,000
December 31, 2022

Land............................................................................ 20,000*
Unrealized Gain on Revaluation—Land........... 20,000*
*($320,000 – $300,000)
December 31, 2023

Unrealized Gain on Revaluation—Land................... 20,000
Loss on Impairment................................................... 20,000
Land.................................................................... 40,000**
**($280,000 – $320,000)
December 31, 2024

Land............................................................................ 25,000***
Recovery of Impairment Loss.......................... 20,000
Unrealized Gain on Revaluation—Land........... 5,000
***($305,000 – $280,000)
Other Accumulated Other

Value at Comprehensive Comprehensive Recognized in
December 31 Income Income Net Income
2020 ¥50,000 ¥50,000 —
2021 (50,000) — (¥40,000)
2022 — — 25,000
2023 10,000 10,000 15,000
2024 50,000 60,000 —
December 31, 2020

Land (¥450,000 – ¥400,000)....................................... 50,000
December 31, 2021

Unrealized Gain on Revaluation—Land................... 50,000
Loss on Impairment (¥400,000 – ¥360,000)............. 40,000
Land (¥450,000 – ¥360,000)............................... 90,000
December 31, 2022

Land (¥385,000 – ¥360,000)....................................... 25,000
Recovery of Impairment Loss.......................... 25,000
December 31, 2023

Land (¥410,000 – ¥385,000)....................................... 25,000
Recovery of Impairment Loss
(¥40,000 – ¥25,000)......................................... 15,000
December 31, 2024

Land (¥460,000 – ¥410,000)....................................... 50,000
(a) January 1, 2021

Equipment............................................................... 12,000
Cash................................................................ 12,000
December 31, 2021

Depreciation Expense (€12,000 ÷ 6)...................... 2,000
Accumulated Depreciation—Equipment...... 2,000

Depreciation Expense............................................ 2,000
Accumulated Depreciation—Equipment.............. 4,000

(2 × €2,000)
Loss on Impairment............................................... 1,000
Equipment (€12,000 – €7,000)................... 5,000
(c) Depreciation expense—2023: (€12,000 – €5,000) ÷ 4 = €1,750

LO: 5, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC Measurement Analysis and Interpretation, AICPA PC: None
(a) Asset turnover:
£10,301
= .736 times
£13,659 + £14,320
2
(b) Return on assets:
£676
= 4.83%
£13,659 + £14,320
2
(c) Profit margin on sales:
£676
= 6.56%
£10,301
(d) The asset turnover times the profit margin on sales provides the return
on assets computed for Eastman as follows:
Profit margin on sales X Asset Turnover Return on Assets

.0656 X .736 = 4.83%
Note the answer 4.83% is the same as the return on assets computed in
(b) above.
*EXERCISE 11.29 (20–25 minutes)
(a) January 1, 2020

Equipment............................................................... 10,000
Cash................................................................ 10,000
December 31, 2020

Depreciation Expense (¥10,000 ÷ 10).................... 1,000
December 31, 2021


(2 × ¥1,000)
Equipment (¥10,000 – ¥8,800)....................... 1,200
Unrealized Gain on Revaluation—
Equipment................................................... 800
December 31, 2022
Depreciation Expense (¥8,800 ÷ 8)........................ 1,100

Accumulated Other Comprehensive Income....... 100

Retained Earnings (¥1,100 – ¥1,000)............ 100
December 31, 2023

Accumulated Other Comprehensive Income....... 100

Retained Earnings.......................................... 100
Accumulated Depreciation—Equipment
(¥1,100 × 2).......................................................... 2,200
Loss on Impairment............................................... 1,000
Unrealized Gain on Revaluation
(¥800 – ¥100 – ¥100)........................................... 600
Equipment (¥8,800 – ¥5,000)......................... 3,800
(b) Su would probably not use revaluation accounting for assets whose fair
value is lower than their carrying value. When the fair value of property
and buildings is less than their carrying value, the difference must be
reported as a loss on impairment which reduces reported net income.
TIME AND PURPOSE OF PROBLEMS
Problem 11.1 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to compute depreciation expense using a number of
different depreciation methods. The problem is complicated because the proper cost of the machine to be
depreciated must be determined. For example, purchase discounts and freight charges must be
considered. In addition, the student is asked to select a depreciation method that will allocate less
depreciation in the early years of the machine’s life than in the later years.

Purpose—to provide the student with an opportunity to compute depreciation expense using the following
methods: straight-line, units-of-output, working hours, sum-of-the-years’-digits, and declining balance.
The problem is straightforward and provides an excellent review of the basic computational issues
involving depreciation methods.

different depreciation methods. Before the proper depreciation expense can be computed, the accounts
must be corrected for a number of errors made by the company in its accounting for the assets. An
excellent problem for reviewing the proper accounting for plant assets and related depreciation expense.

Purpose—to provide the student with an opportunity to correct the improper accounting for trucks and
determine the proper depreciation expense. The student is required to compute separately the errors
arising in determining or entering depreciation or in recording transactions affecting Semitrucks.

Purpose—to provide the student with a comprehensive problem related to property, plant, and equipment.
The student must determine depreciable bases for assets, including capitalized interest, and prepare
depreciation entries using various methods of depreciation.

Purpose—to provide the student with an opportunity to solve a complex problem involving a number of
plant assets. A number of depreciation computations must be made, specifically straight-line, 150%
declining balance, and sum-of-the-years’-digits. In addition, the cost of assets acquired is difficult to
determine.

Purpose—to provide the student with the opportunity to solve a moderate problem involving a machinery
purchase and the depreciation computations using straight-line, activity, sum-of-the-years’-digits, and the
double-declining-balance methods, first for full periods and then for partial periods.

different depreciation methods. The purpose of computing the depreciation expense is to determine which
method will result in the maximization of net income and which will result in the minimization of net
income over a three-year period. An excellent problem for reviewing the fundamentals of depreciation
accounting.

Purpose—to provide the student with an opportunity to analyze impairments for assets to be used and
assets to be disposed of.
Time and Purpose of Problems (Continued)

Purpose—to provide the student with an opportunity to compute the amount of an impairment loss. The
student is also required to prepare journal entries to record an impairment loss and a reversal of an
impairment loss.

Purpose—to provide the student with a problem involving depletion and computation of profit or loss. The
student is asked to explain how to account for exploration and evaluation costs.

Purpose—to provide the student with a problem involving the computation of estimated depletion and
depreciation costs associated with a tract of mineral land. The student must compute depletion and de-
preciation on a units-of-production basis (tons mined). A portion of the cost of machinery associated with
the product must be allocated over different periods. The student may experience some difficulty with this
problem.
*Problem 11.13 (Time 20–25 minutes)

Purpose—to provide the student with the opportunity to record land revaluation adjustments for 3 years.
The student is also required to determine the amount of other comprehensive income, impairment loss,
and accumulated other comprehensive income for 2 years.
*Problem 11.14 (Time 25–35 minutes)

Purpose—to provide the student with an opportunity to record equipment revaluation adjustments for 3
years. The student is also required to determine the amount of other comprehensive income, depreciation
expense, impairment loss, and accumulated other comprehensive income for 2 years.
SOLUTIONS TO PROBLEMS
PROBLEM 11.1
(a) 1. Depreciable Base Computation:

Purchase price................................ $85,000
Less: Purchase discount (2%)...... 1,700
Freight-in......................................... 800
Installation...................................... 3,800
Cost................................................. 87,900
Less: Residual (sale) value........... 1,500
Depreciation base........................... $86,400
2022—Straight line: ($86,400 ÷ 8 years) × 8/12 year = $7,200
2. Sum-of-the-years’-digits for 2023
Total
Machine Year Depreciation 2022 2023
1 8/36* × $86,400 = $19,200 $12,800** $ 6,400***
2 7/36* × $86,400 = $16,800 11,200****
$ 17,600
*1+2+3+4+5+6+7+8 or [8 × (8 +1)] ÷ 2
** $19,200 × 8/12 = $12,800
*** $19,200 × 4/12 = $ 6,400
**** $16,800 × 8/12 = $11,200
3. Double-declining-balance for 2022

($87,900 × .25***** × 8/12) = $14,650
*****[(1.00 ÷ 8) × 2]
(b) An activity method.
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision
Making
PROBLEM 11.2
Depreciation Expense
2022 2023
(a) Straight-line:
(€89,000 – €5,000) ÷ 7 = €12,000/yr.
2022: €12,000 × 7/12 €7,000
2023: €12,000 €12,000
(b) Units-of-output:
(€89,000 – €5,000) ÷ 525,000 units = €.16/unit
2022: €.16 × 55,000 8,800
2023: €.16 × 48,000 7,680
(c) Working hours:

(€89,000 – €5,000) ÷ 42,000 hrs. = €2.00/hr.
2022: €2.00 × 6,000 12,000
2023: €2.00 × 5,500 11,000
(d) Sum-of-the-years’-digits:
n(n + 1) 7×8
1 + 2 + 3 + 4 + 5 + 6 + 7 = 28 or = = 28
2 2
2022: 7/28 × €84,000 × 7/12 12,250

2023: 7/28 × €84,000 × 5/12 = € 8,750
6/28 × €84,000 × 7/12 = 10,500
€19,250 19,250
(e) Declining-balance:
Rate = 2/7 or (1.00 ÷ 7) × 2
2022: 7/12 × 2/7 × €89,000 14,833
2023: 2/7 × (€89,000 – €14,833) = €21,191
OR
2023: 5/12 × 2/7 × €89,000 = €10,595
2/7 × (€89,000 – €25,428**)
× 7/12 10,595
€21,190* 21,190
*Difference due to rounding. **(€14,833 + €10,595)
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision
Making
PROBLEM 11.3
(a) Depreciation Expense...................................................... 3,900

Accumulated Depreciation—Asset A
(5/55* × [£46,000 – £3,100]).................................. 3,900
*[10 × (10 + 1)] ÷ 2
Accumulated Depreciation—Asset A.............................. 35,100
Asset A (£46,000 – £13,000).................................... 33,000
Gain on Disposal of Plant Assets**........................ 2,100
**($46,000 - $35,100) - $13,000
(b) Depreciation Expense...................................................... 6,720
Accumulated Depreciation—Asset B
([£51,000 – £3,000] ÷ [15,000 × 2,100])................ 6,720
(c) Depreciation Expense...................................................... 6,000

Accumulated Depreciation—Asset C
([£80,000 – £15,000 – £5,000] ÷ 10)...................... 6,000
(d) Asset E............................................................................... 28,000

Retained Earnings................................................... 28,000
Depreciation Expense......................................................5,600***
Accumulated Depreciation—Asset E..................... 5,600
***(£28,000 × .20^) ^[(1.00 ÷ 10) × 2]
Note: No correcting entry is needed for asset D. In 2022, Eshkol

recorded depreciation expense of £80,000 × [(1.00 ÷ 10) × 2] = £16,000.
Depreciation Expense......................................................16,000
Accumulated Depreciation—Asset D.................... 16,000
LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 40-50, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision
Making
(a) Per Company Books As Adjusted Net
Retained Acc. Dep., Retained Income

Acc. Dep.
Trucks Earnings Trucks Semitrucks Earnings Overstated
Semitrucks
dr. (cr.) dr. (cr.) dr. (cr.) dr. (cr.) dr. (cr.) (Understated)
dr. (cr.)
1/1/20 Balance ¥ 94,000 ¥(30,200) ¥94,000 ¥(30,200)
7/1/20 Purchase Truck #5 22,000 40,000

1
Trade Truck #3 (30,000) 9,000 ¥ 3,000 ¥ 3,000
2
12/31/20 Depreciation ________ (21,000) ¥21,000 _______ (19,800) 19,800 (1,200)
12/31/20 Balances 116,000 (51,200) 21,000 104,000 (41,000) 22,800 1,800
3
1/1/21 Sale of Truck #1 (3,500) (18,000) 14,400 100 100
4
12/31/21 Depreciation ________ (22,500) 22,500 _______ (17,200) 17,200 (5,300)
12/31/21 Balances 112,500 (73,700) 43,500 86,000 (43,800) 40,100 (3,400)
7/1/22 Purchase of Truck #6 42,000 42,000
5
7/1/22 Disposal of Truck #4 (2,500) (700) (24,000) 14,400 6,400 7,100
6
12/31/22 Depreciation ________ (25,050) 25,050 _______ (16,800) 16,800 (8,250)
PROBLEM 11.4
12/31/22 Balances 152,000 (98,750) 67,850 104,000 (46,200) 63,300 (4,550)

7
12/31/23 Depreciation ________ (30,400) 30,400 _______ (16,400) 16,400 (14,000)
12/31/23 Balances ¥152,000 ¥(129,150) ¥98,250 ¥104,000 ¥(62,600) ¥79,700 ¥(18,550)
Income effect
Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only)
1
Implied fair value of Truck #3 (¥40,000 – ¥22,000) ¥ 18,000
Book value of Truck #3 [¥30,000 – (¥30,000/5 × 1 1/2 yrs.)] = ¥30,000 – ¥9,000 = 21,000
Loss on Trade ¥ 3,000
2
Truck #1: ¥18,000/5 = ¥ 3,600
Truck #2: ¥22,000/5 = 4,400
Truck #3: ¥30,000/5 × 1/2 = 3,000
Truck #4: ¥24,000/5 = 4,800
Truck #5: ¥40,000/5 × 1/2 = 4,000
Total ¥19,800
11-43
PROBLEM 11.4 (Continued)
3
Book value of Truck #1 [¥18,000 – (¥18,000/5 × 4 yrs.)] =
¥18,000 – ¥14,400.............................................................. = ¥3,600
Cash received on sale................................................................ = (3,500)
Loss on sale...................................................................... ¥ 100
4
Truck #2: ¥22,000/5 = ¥4,400
Truck #4: ¥24,000/5 = 4,800
Truck #5: ¥40,000/5 = 8,000
Total ¥17,200
5
Book value of Truck #4 ¥24,000 – [(¥24,000/5 × 3 yrs.)]......... = ¥9,600
Cash received (¥700 + ¥2,500).................................................. = (3,200)
Loss on disposal............................................................... ¥6,400
6
Truck #2: ¥22,000/5 × 1/2 = ¥ 2,200
Truck #4: ¥24,000/5 × 1/2 = 2,400
Truck #5: ¥40,000/5 8,000
Truck #6: ¥42,000/5 × 1/2 = 4,200
Total ¥16,800
7
Truck #2: (fully dep.) = ¥ 0
Truck #5: ¥40,000/5 = 8,000
Truck #6: ¥42,000/5 = 8,400
Total ¥16,400
(b) Compound journal entry December 31, 2023:

Accumulated Depreciation—Trucks........................ 66,550
Trucks................................................................ 48,000
Retained Earnings............................................ 4,550
Depreciation Expense 2023............................. 14,000
Summary of Adjustments:
Per As Adjustment
Books Adjusted Dr. or (Cr.)
Trucks ¥152,000 ¥104,000 ¥(48,000)
Accumulated Depreciation ¥129,150 ¥ 62,600 ¥ 66,550
Prior Years’ Income
Retained Earnings, 2020 ¥ 21,000 ¥ 22,800 ¥ 1,800
Retained Earnings, 2021 22,500 17,300 (5,200)
Retained Earnings, 2022 24,350 23,200 (1,150)
Totals ¥ 67,850 ¥ 63,300 ¥ (4,550)
Depreciation Expense, 2023 ¥ 30,400 ¥ 16,400 ¥(14,000)
LO: 1, 2, Bloom: AP, Difficulty: Complex, Time: 45-60, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision
Making
PROBLEM 11.5
(a) The amounts to be recorded on the books of Darby Sporting Goods

Plc. as of December 31, 2022, for each of the properties acquired from
Quay Athletic Equipment are calculated as follows:
Cost Allocations to Acquired Properties
Remaining
Purchase
Appraisal Price Capitalize
Value Allocations Renovation d Interest Total
s
(1) Land £290,000 £290,00
0
(2) Building £ 77,0001 £100,000 £21,0002 198,00
0
(3) 33,0001 33,00
Machinery 0
Totals £290,000 £110,000 £100,000 £21,000 £521,00
0
Supporting Calculations
1
Balance of purchase price to be allocated.
Total purchase price............................................................ £400,000
Less: Land appraisal........................................................... 290,000
Balance to be allocated.............................................. £110,000
Appraisal Allocated
Values Ratios Values
Building £105,000 105/150 .70 X £110,000 £ 77,000
=
Machinery 45,000 45/150 .30 X £110,000 33,000
=
Totals £150,000 1.00 £110,000
2
Capitalizable interest.
Expenditures Capitalization Weighted-Average
Date Amount Period Accumulated Expenditures
1/1 £ 50,000 12/12 £ 50,000
4/1 120,000 9/12 90,000
10/1 140,000 3/12 35,000
12/31 190,000 0/12 –0–
£500,000 £175,000
Weighted-Average Interest Avoidable

Accumulated Expenditures X Rate = Interest
£175,000 .12 £21,000
Note to instructor: If the interest is allocated between the building and the
machinery, £14,700 (£21,000 × 105/150) would be allocated to the building
and £6,300 (£21,000 × 45/150) would be allocated to the machinery.
(b) Darby Sporting Goods Inc.’s 2023 depreciation expense, for book
purposes, for each of the properties acquired from Quay Athletic
Equipment Company is as follows:
1. Land: No depreciation.
2. Building: Depreciation rate = 1.50 × 1/15 = .10

2023 depreciation expense = Cost × Rate × 1/2 year
= £198,000 × .10 × 1/2
= £9,900
3. Machinery: Depreciation rate = 2.00 × 1/5 = .40

2023 depreciation expense = Cost × Rate × 1/2
= £33,000 × .40 × 1/2
= £6,600
(c) Arguments for the capitalization of interest costs include the following.
1. Diversity of practices among companies and industries called for
standardization in practices.
2. Total interest costs should be allocated to enterprise assets and
operations, just as material, labor, and overhead costs are allo-
cated. That is, under the concept of historical costs, all costs
incurred to bring an asset to the condition and location necessary
for its intended use should be reflected as a cost of that asset.
Arguments against the capitalization of interest include the following:

1. Interest capitalized in a period would tend to be offset by amorti-
zation of interest capitalized in prior periods.
2. Interest cost is a cost of financing, not of construction.
(d) If Darby decides to use revaluation accounting for this building, then
revaluation applies to all assets in that class of assets. Darby cannot
selectively apply revaluation accounting to certain buildings but keep
others at historical cost.
Darby should use revaluation accounting if they want to increase their

equity base to help them meet covenant requirements or provide
additional assurances to investors and creditors that the company is
solvent.
Darby should not use revaluation accounting because of the continuing

costs associated with appraisals to determine fair value. In addition,
losses associated with revaluations decrease net income but gains
associated with revaluations are not reported in net income but instead
go directly to equity.
LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC:
Decision Making
PROBLEM 11.6
(1) $80,000 Allocated in proportion to appraised values

(*1/10 × $800,000). *[$90,000 ÷ ($810,000 + $90,000)
(2) $720,000 Allocated in proportion to appraised values

(**9/10 × $800,000). **[$810,000 ÷ ($810,000 + $90,000)
(3) Fifty years Cost less residual ($720,000 – $40,000) divided by

annual depreciation ($13,600).
(4) $13,600 Same as prior year since it is straight-line depreciation.
(5) $91,000 [Number of shares (2,500) times fair value ($30)]

plus demolition cost of existing building ($16,000).
(6) None No depreciation before use.
(7) $40,000 Fair value.
(8) $6,000 Cost ($40,000) times percentage (1/10 × ***1.50).

***[1.00 ÷ 10) × 1.50
(9) $5,100 Cost ($40,000) less prior year’s depreciation ($6,000)
equals $34,000. Multiply $34,000 × .15***
(10) $168,000 Total cost ($182,900) less repairs and maintenance

($14,900).
(11) $36,000 Cost less residual ($168,000 – $6,000) times 8/36****.
(12) $10,500 Cost less residual ($168,000 – $6,000) times 7/36****

times one-third or 4/12 of a year.
****[8 × (8 + 1)] ÷ 2
(13) $52,000 Annual payment ($6,000) times present value of annuity

due at 8% for 11 years (7.710) plus down payment
($5,740). This can be found in an annuity due table since
the payments are at the beginning of each year.
Alternatively, to convert from an ordinary annuity to an
annuity due factor, proceed as follows: For eleven
payments use the present value of an ordinary annuity
for 11 years (7.139) times 1.08. Multiply this factor
(7.710) times $6,000 annual payment to obtain $46,260,
and then add the $5,740 down payment.
(14) $2,600 Cost ($52,000) divided by estimated life (20 years).

LO: 1, 2, Bloom: AP, Difficulty: Complex, Time: 45-60, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision
Making
PROBLEM 11.7
$90,000 – $6,000
(a) 1. Straight-line Method: = $16,800 a year
5 years
$90,000 – $6,000
2. Activity Method: = $.84 per hour
100,000 hours
Year 2020 20,000 hrs. × $.84 = $16,800

2021 25,000 hrs. × $.84 = 21,000
2022 15,000 hrs. × $.84 = 12,600
2023 30,000 hrs. × $.84 = 25,200
2024 10,000 hrs. × $.84 = 8,400
3. Sum-of-the-Years’-Digits: 5 + 4 + 3 + 2 + 1 = 15 or [5 × (5 + 1)] ÷ 2
Year 2020 5/15 × ($90,000 – $6,000) = $28,000

2021 4/15 × $84,000 = 22,400
2022 3/15 × $84,000 = 16,800
2023 2/15 × $84,000 = 11,200
2024 1/15 × $84,000 = 5,600
4. Double-Declining-Balance Method: Each year is 20% (1.00 ÷ 5) of

its total life. Double the rate to 40% (.20 × 2).
Year 2020 .40 × $90,000 = $36,000

2021 .40 × ($90,000 – $36,000) = 21,600
2022 .40 × ($90,000 – $57,600) = 12,960
2023 .40 × ($90,000 – $70,560) = 7,776
2024 Enough to reduce to salvage = 5,664
[($90,000 - $6,000) - $78,336]
(b) 1. Straight-line Method:
$90,000 – $6,000
Year 2020 X 9/12 = $12,600
5 years
2021 Full year 16,800
2022 Full year 16,800
2023 Full year 16,800
2024 Full year 16,800
2025 Full year × 3/12 year = 4,200
2. Sum-of-the-Years’-Digits:
2020 (5/15 × $84,000) × 9/12 = $21,000
2021 (5/15 × $84,000) × 3/12 = $ 7,000

(4/15 × $84,000) × 9/12 = 16,800 23,800
2022 (4/15 × $84,000) × 3/12 = 5,600

(3/15 × $84,000) × 9/12 = 12,600 18,200
2023 (3/15 × $84,000) × 3/12 = 4,200

(2/15 × $84,000) × 9/12 = 8,400 12,600
2024 (2/15 × $84,000) × 3/12 = 2,800

(1/15 × $84,000) × 9/12 = 4,200 7,000
2025 (1/15 × $84,000) × 3/12 = 1,400
3. Double-Declining-Balance Method:
Accum. Book
Depr. at Value at
beg. of beg. of Depr.
Year Cost Year Year Expense
2020 $90,000 — $90,000 $27,000 (1)
2021 90,000 $27,000 63,000 25,200 (2)
2022 90,000 52,200 37,800 15,120 (3)
2023 90,000 67,320 22,680 9,072 (4)
2024 90,000 76,392 13,608 5,443 (5)
2025 90,000 81,835 8,165 2,165 (6)
(1) $90,000 × .40 × 9/12

(2) ($90,000 – $27,000) × .40
(3) ($90,000 – $52,200) × .40
(4) ($90,000 – $67,320) × .40
(5) ($90,000 – $76,392) × .40
(6) to reduce to $6,000 residual value.
[($90,000 - $6,000) - $81,835]
Making
PROBLEM 11.8
The straight-line method would provide the highest total net income for
financial reporting over the three years, as it reports the lowest total
depreciation expense. These computations are provided below.
Computations of depreciation expense and accumulated depreciation under

various assumptions:
(1) Straight-line:
R$1,260,000 – R$60,000 = R$1,200,000** = R$240,000

5 years
Depreciation Accumulated
Year Expense Depreciation
2021 R$240,000 R$240,000
2022 240,000 R$480,000
2023 240,000 R$720,000
R$720,000
(2) Double-declining-balance:
2021 R$504,000 (*.40 × R$1,260,000) R$504,000
2022 302,400 (*.40 × R$756,000) R$806,400
2023 181,440 (*.40 × R$453,600) R$987,840
R$987,840 *[(1.00 ÷ 5) × 2]
(3) Sum-of-the-years’-digits:
2021 R$400,000 (5/15*** × R$1,200,000**) R$400,000
2022 320,000 (4/15*** × R$1,200,000) R$720,000
2023 240,000 (3/15*** × R$1,200,000) R$960,000
R$960,000 ***(1+2+3+4+5) or [5 × (5 +1)] ÷ 2
(4) Units-of-output:
2021 R$288,000 (R$24* × 12,000) R$288,000
2022 264,000 (R$24 × 11,000) R$552,000
2023 240,000 (R$24 × 10,000) R$792,000
R$792,000
*R$1,200,000 ÷ 50,000 (total units) = R$24 per unit

Making
PROBLEM 11.9
(a) Carrying value of asset: €10,000,000 – €2,500,000* = €7,500,000.
*(€10,000,000 ÷ 8) × 2
Recoverable amount (€5,600,000) < Carrying value (€7,500,000)
Impairment entry:
Loss on Impairment........................................ 1,900,000*
Equipment.......................................... 1,900,000
*€7,500,000 – €5,600,000
(b) Depreciation Expense.................................... 1,400,000**

Equipment.......................................... 1,400,000
**(€5,600,000 ÷ 4)

Recovery of Impairment Loss.............. 700,000
€4,900,000 – (€5,600,000 –
€1,400,000)
(c) No depreciation is recorded on impaired assets to be disposed of.

Recovery of impairment losses are recorded.
December 31, 2022

Loss on Impairment........................................ 1,900,000
Equipment.......................................... 1,900,000
December 31, 2023

Loss on Impairment........................................ 700,000
Equipment (€5,600,000 –
€4,900,000)...................................... 700,000
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision
Making
PROBLEM 11.10
Part I
(a) Calculation of the machine’s value-in-use at the end of 2022
Future Cash Present Value Discounted

Year Flows Factor Cash Flow
2023 ¥22,165 0.86957 ¥ 19,274
2024 21,450 0.75614 16,219
2025 20,550 0.65752 13,512
2026 24,725 0.57175 14,137
2027 25,325 0.49718 12,591
2028 24,825 0.43233 10,733
2029 24,123 0.37594 9,069
2030 25,533 0.32690 8,347
2031 24,234 0.28426 6,889
2032 22,850 0.24719 5,648
Value in use ¥116,419
The calculation of the impairment loss at the end of 2022 is as follows.
Machine
Carrying amount before impairment loss......... ¥150,000
Recoverable amount (value-in-use).................. (116,419)
Impairment loss.................................................. ¥ 33,581
Loss on Impairment............................................ 33,581

Accumulated Depreciation—Machine...... 33,581
Part II
(c) Revised Cash Flows
Future Cash Present Value Discounted

Year Flows Factor 15% Cash Flow
2027 ¥30,321 .86957 ¥ 26,366
2028 32,750 .75614 24,764
2029 31,721 .65752 20,857
2030 31,950 .57175 18,267
2031 33,100 .49718 16,457
2032 27,999 .43233 12,105
Value-in-use ¥118,816
Calculation of the reversal of the impairment loss at the end of 2026
Carrying amount at the end of 2022 (Part I)....... ¥116,419

Depreciation charge: 2023 to 2026
[(¥116,419/10) × 4].............................................. (46,568)
Costs to enhance the asset’s performance....... 25,000
Carrying amount before reversal........................ ¥ 94,851
A—Recoverable amount (Value-in-use)............. ¥118,816

B—Carrying amount based on depreciated
historical cost................................................ ¥115,000*
*Original cost........................................................ ¥150,000

Accumulated depreciation
based on historical cost (¥15,000 × 4)......... (60,000)
Costs to enhance................................................ 25,000
¥115,000
Carrying amount after reversal—lower of A, B: ¥115,000
Reversal of the impairment loss ¥20,149 (¥115,000 – ¥94,851) is recorded

as follows.
Accumulated Depreciation—Machine................ 20,149

Recovery of Impairment Loss...................... 20,149
Making
PROBLEM 11.11
(a) Cost per barrel: (£1,200,000 + £50,000) ÷ 500,000 = £2.5/barrel
(b) Sales (36,000 × £65)......................................... £2,340,000

Expenses:
Depletion (36,000 × £2.5)......................... £90,000
Premium payment (£2,340,000 × .04)..... 93,600
Annual rental............................................ 62,000 245,600
Current year profit................................... £2,094,400
(c) Phelps has a choice on how to account for its exploration and evaluation
costs. It can either write off these costs as incurred or capitalize them
pending evaluation.
Making
PROBLEM 11.12
(a) Estimated depletion:
Estimated Depletion
Depletion Estimated Per 1ST & 11th Each of Yrs.
Base Yield Ton Yrs. 2-10 Incl.
$870,000* 120,000 tons $7.25 $43,500** $87,000***
*($900,000 – $30,000)
**($7.25 × 6,000)
***($7.25 × 12,000)
Estimated depreciation:
Per ton 1st Yrs. 6th Yrs. 11th

Asset Cost Mined Yr. 2–5 Yr. 7–10 Yr.
Building $36,000 $.30* $1,800 $3,600 $3,600 $3,600 $1,800
Machinery (1/2) 30,000 .25** 1,500 3,000 3,000 3,000 1,500
Machinery (1/2) 30,000 .50*** 3,000 6,000 3,000 0 0
* $36,000 ÷ 120,000 = $.30

** $30,000 ÷ 120,000 = $.25
*** $30,000 ÷ 60,000 = $.50
(b) Depletion: $7.25 × 5,000 tons = $36,250
Depreciation: Building $.30 × 5,000 = $1,500

Machinery $.25 × 5,000 = 1,250
Machinery $.50 × 5,000 = 2,500
Total depreciation $5,250
Making
*PROBLEM 11.13

Land (HK$215,000 – HK$200,000)....................... 15,000
Unrealized Gain on Revaluation—Land.... 15,000
(b) Dec. 31, 2022 Dec. 31, 2023

Land HK$185,000 HK$205,000
Other Comprehensive Income (15,000) 5,000
Impairment Loss (15,000) 15,000
Accumulated Other Comprehensive
— 5,000
Income
(c) December 31, 2022
Unrealized Gain on Revaluation—Land............. 15,000

Loss on Impairment............................................. 15,000
Land (HK$215,000 – HK$185,000).............. 30,000
December 31, 2023

Land (HK$205,000 – HK$185,000)....................... 20,000
Recovery of Impairment Loss.................... 15,000
Unrealized Gain on Revaluation—Land.... 5,000
(d) January 15, 2024

Cash...................................................................... 220,000
Land.............................................................. 205,000
Gain on Disposal of Land........................... 15,000
Accumulated Other Comprehensive Income.... 5,000

Retained Earnings....................................... 5,000
Making
*PROBLEM 11.14
(a) January 2, 2022
Equipment............................................................... 500,000
Cash................................................................ 500,000
December 31, 2023
Depreciation Expense (€500,000 ÷ 10)................. 50,000

Accumulated Depreciation—Equipment..... 50,000

Equipment (€500,000 – €468,000)................. 32,000
Unrealized Gain on Revaluation—
Equipment [(€500,000 - €50,000) - €468,000]... 18,000
(b) Dec. 31, 2023 Dec. 31, 2024

Equipment €380,000 €355,000
Other Comprehensive Income (16,000) 2,500
Depreciation Expense 52,000 47,500
Impairment Loss 20,000 (20,000)
Income (0) 5,000
Depreciation Expense (€468,000 ÷ 9).................... 52,000

Accumulated Other Comprehensive Income....... 2,000

Retained Earnings (€52,000 – €50,000)........ 2,000
Accumulated Depreciation.................................... 52,000

Unrealized Gain on Revaluation—Equipment*.... 16,000
Loss on Impairment (€400,000 – €380,000).......... 20,000
Equipment (€468,000 – €380,000)................. 88,000
*[(€468,000 - €52,000) - €380,000 - €20,000]
*PROBLEM 11.14 (Continued)
Depreciation Expense (€380,000 ÷ 8).................... 47,500

Retained Earnings (€50,000 – €47,500)................. 2,500

Income........................................................ 2,500

Recovery of Impairment Loss...................... 20,000
Unrealized Gain on Revaluation**................ 2,500
Equipment (€380,000 – €355,000)................. 25,000
**[(€380,000 - €47,500) - €355,000 - €20,000]
(d) December 31, 2025
Cash......................................................................... 330,000
Loss on Disposal of Equipment............................ 25,000
Equipment...................................................... 355,000
Accumulated Other Comprehensive Income....... 5,000

Retained Earnings......................................... 5,000
Making
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 11.1 (Time 25–35 minutes)

Purpose—to provide the student with an understanding of the basic objective of depreciation accounting.
In addition, the case involves a reverse sum-of-the-years’-digits situation and the student is to comment
on the propriety of such an approach. Finally, the classic issue of whether depreciation provides funds
must be considered. The tax effects of depreciation must be considered when this part of the case is
examined. An excellent case for covering the traditional issues involving depreciation accounting.

Purpose—to provide the student with an understanding of a number of unstructured situations involving
depreciation accounting. The first situation considers whether depreciation should be recorded during a
strike. The second situation involves the propriety of employing the units-of-production method in certain
situations. The third situation involves the step-up of depreciation charges because properties are to be
replaced due to obsolescence. The case is somewhat ambiguous, so cut-and-dried approaches should
be discouraged.

Purpose—to provide the student with an understanding of the objectives of depreciation and the
theoretical basis for accelerated depreciation methods.

Purpose—to provide the student with the opportunity to examine the ethical dimensions of the depre-
ciation method choice.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 11.1
(a) The purpose of depreciation is to distribute the cost (or other book value) of tangible plant assets,
less residual value, over their useful lives in a systematic and rational manner. Under IFRS,
depreciation accounting is a process of allocation, not of valuation, through which the productive
effort (cost) is to be matched with productive accomplishment (revenue) for the period. Depreciation
accounting, therefore, is concerned with the timing of the expiration of the cost of tangible plant
assets.
(b) The proposed depreciation method is, of course, systematic. Whether it is rational in terms of cost
allocation depends on the facts of the case. It produces an increasing depreciation charge, which is
usually not justifiable in terms of the benefit from the use of the asset because manufacturers
typically prefer to use their new equipment as much as possible and their old equipment only as
needed to meet production quotas during periods of peak demand. As a general rule, then, the
benefit declines with age. Assuming that the actual operations (including equipment usage) of each
year are identical, maintenance and repair costs are likely to be higher in the later years of usage
than in the earlier years. Hence the proposed method would couple light depreciation and repair
charges in the early years. Reported net income in the early years would be much higher than
reported net income in the later years of asset life, an unreasonable and undesirable variation during
periods of identical operation.
On the other hand, if the expected level of operations (including equipment usage) in the early years
of asset life is expected to be low as compared to that of later years because of slack demand or
production policies, the pattern of the depreciation charges of the proposed method approximately
parallels expected benefits (and revenues) and hence is reasonable. Although the units-of-
production depreciation method is the usual selection to fit this case, the proposed method also
conforms to IFRS in this case provided that proper justification is given.
(c) (1) Depreciation charges neither recover nor create funds. Revenue-producing activities are the
sources of funds from operations: if revenues exceed out-of-pocket costs during a fiscal period,
funds are available to cover other than out-of-pocket costs; if revenues do not exceed out-of-
pocket costs, no funds are made available no matter how much, or little, depreciation is
charged.
(2) Depreciation may affect funds in two ways. First, depreciation charges affect reported income
and hence may affect managerial decisions such as those regarding pricing, product selection,
and dividends. For example, the proposed method would result initially in higher reported
income than would the straight-line method, consequently shareholders might demand higher
dividends in the earlier years than they would otherwise expect.
The straight-line method, by causing a lower reported income during the early years of asset
life and thereby reducing the amount of possible dividends in early years as compared with the
proposed method, could encourage earlier reinvestments in other profit-earning assets in order
to meet increasing demand.
CA 11.1 (Continued)
Second, depreciation charges affect reported taxable income and hence affect directly the amount of
income taxes payable in the year of deduction.
Using the proposed method for tax purposes would reduce the total tax bill over the life of the assets
(1) if the tax rates were increased in future years or (2) if the business were doing poorly now but
were to do significantly better in the future. The first condition is political and speculative, but the
second condition may be applicable to Hakodat Manufacturing Company in view of its recent origin
and its rapid expansion program. Consequently, more funds might be available for reinvestment in
plant assets in years of large deductions if one of the above assumptions were true.
If Hakodat is not profitable now, it would not benefit from higher deductions now and should consider
an increasing charge method for tax purposes, such as the one proposed. If Hakodat is quite
profitable now, the president should reconsider his proposal because it will delay the availability of
the tax shield provided by depreciation. However, this decision should not affect the decision to use
a depreciation method for shareholders’ reporting that is systematic and rational in terms of cost
allocation under IFRS as presently understood.
LO: 1, Bloom: E, Difficulty: Moderate, Time: 25-35, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 11.2
Situation I. This position relates to the omission of a provision for depreciation during a strike. The same
question could be raised with respect to plant shut-downs for many reasons, such as for a lack of sales or
for seasonal business.
The method of depreciation used should be systematic and rational. The annual provision for depreciation
should represent a fair estimate of the cost expiration arising from wear and usage and also from
obsolescence. Each company should analyze its own facts and establish the best method under the
circumstances. If the company was employing a straight-line depreciation method, for example, it is
inappropriate to stop depreciating the plant asset during the strike.
If the company employs a units-of-production method, however, it would be appropriate not to depreciate
the asset during this period. Even in this latter case, however, if the strike were prolonged, it might be
desirable to record some depreciation because of the obsolescence factors related to the passage of
time.
Situation II. (a) Steady demand for the new blenders suggests use of the straight-line method or the units-
of-production method, either of which will allocate cost evenly over the life of the machine. Decreasing
demand indicates use of an accelerated method (declining-balance or sum-of-the-years’-digits) or the
units-of-production method in order to allocate more of the cost to the earlier years of the machine’s life.
Increasing demand indicates the use of the units-of-production method to charge more of the cost to the
later years of the machine’s life.
CA 11.2 (Continued)
(b) In determining the depreciation method to be used for the machine, the objective should be to
allocate the cost of the machine over its useful life in a systematic and rational manner, so that costs
will be matched with the benefits expected to be obtained. In addition to demand, consideration
should be given to the items discussed below, their interrelationships, the relative importance of
each, and the degree of certainty with which each can be predicted:
The expected pattern of costs of repairs and maintenance should be considered. Costs which
vary with use of the machine may suggest the use of the units-of-production method. Costs
which are expected to be equal from period to period suggest the use of the straight-line method.
If costs are expected to increase with the age of the machine, an accelerated method may be
considered reasonable because it will tend to equalize total expenses from period to period.
The operating efficiency of the machine may change with its age. A decrease in operating
efficiency may cause increases in such costs as labor and power; if so, an accelerated method is
indicated. If operating efficiency is not expected to decline, the straight-line method is indicated.
Another consideration is the expiration of the physical life of the machine. If the machine wears
out in relation to the passage of time, the straight-line method is indicated. Within this maximum
life, if the usage per period varies, the units-of-production method may be appropriate.
The machine may become obsolete because of technological innovation; it may someday be
more efficient to replace the machine even though it is far from worn out. If the probability is high
that such obsolescence will occur in the near future, the shortened economic life should be
recognized. Within this shortened life, the depreciation method used would be determined by
evaluating such consideration as the anticipated periodic usage.
An example of the interrelationship of the items discussed above is the effect of the repairs and
maintenance policy on operating efficiency and physical life of the machine. For instance, if only
minimal repairs and maintenance are undertaken, efficiency may decrease rapidly and life may
be short.
It is possible that different considerations may indicate different depreciation methods for the
machine. If so, a choice must be made based on the relative importance of the considerations.
For instance, physical life may be less important than the strong chance of technological
obsolescence which would result in a shorter economic life.
Situation III. Depreciation rates should be adjusted in order that the operating sawmills which are to be
replaced will be depreciated to their residual value by the time the new facility becomes available. The
step-up in the depreciation rates should be considered as a change in estimate and prior years’ financial
statements should not be adjusted.
The idle mill should be written off immediately as it appears to have no future service potential.
LO: 1, 2, Bloom: E, Difficulty: Moderate, Time: 25-35, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 11.3
To: Phil Perriman, Supervisor of Canning Room
From: Your name, Accountant
Date: January XX, 2022
Subject: Annual depreciation charge to the canning department
This memo addresses the questions you asked about the depreciation charge against your department.
Admittedly this charge of $625,000 [(1.00 ÷ 12) × 2 × $625,000 × 6 machines) is very high; however, it is
not intended to reflect the wear and tear which the machinery has undergone over the last year. Rather, it
is a portion of the machines’ cost which has been allocated to this period.
Depreciation is frequently thought to reflect an asset’s loss in value over time. For financial statement
purposes, however, depreciation allocates part of an asset’s cost in a systematic way to each period
during its useful life. Although there will always be a decline in an asset’s value over time, the deprecia-
tion charge is not supposed to measure that decline; instead, it is a periodic “charge” for using purchased
equipment during any given period.
You also mentioned that using straight-line depreciation would result in a smaller charge than would
the current double-declining-balance method. This is true during the first years of the equipment’s life.
Straight-line depreciation expenses even amounts of depreciation for each canning machine’s twelve-
year life. Thus the straight-line charge for this and all subsequent years would be $47,500 per machine
for total annual depreciation of $285,000 {6 × [($625,500 - $55,000) ÷12]}.
During the earlier years of an asset’s life, the double-declining-balance method results in higher deprecia-
tion charges because it approximately doubles the charge which would have been made under the
straight-line method. However, the same percentage depreciation in the first year is applied annually to
the asset’s declining book value. Therefore, the double-declining-balance charge becomes lower than the
straight-line charge during the last several years of the asset’s life. For this year, as mentioned above, the
charge is $625,000, but in subsequent years this expense will become lower. By the end of the twelfth
year, the same amount of depreciation will be taken in total regardless of the method used.
The straight-line method would result in fewer charges against your department this year. However,
consider this: when the asset is new, additional costs for service and repairs are minimal. Thus a greater
part of the asset’s cost should be allocated to this optimal portion of the asset’s life. After a few years,
your department will have to absorb the additional burden of repair and maintenance costs. During that
time, wouldn’t you rather have a lower depreciation charge?
I hope that this explanation helps clarify any questions which you may have had about depreciation
charges to your department.
LO: 1, Bloom: E, Difficulty: Moderate, Time: 25-35, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 11.4
(a) The stakeholders are Beeler’s employees, including Prior, current and potential investors and
creditors, and upper-level management.
(b) The ethical issues are honesty and integrity in financial reporting, job security, and the external
users’ right to know the financial picture.
(c) Prior should review the estimated useful lives and residual values of the depreciable assets. Since
they are estimates, it is possible that some should be changed. Any changes should be based on
sound, objective information without concern for the effect on the financial statements (or anyone’s
job).
(Note: This case can be used with Chapter 22, Accounting Changes and Error Analysis.)
LO: 1, Bloom: E, Difficulty: Moderate, Time: 20-25, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, Ethical Conduct
FINANCIAL REPORTING PROBLEM
(a) M&S uses the title “Property, Plant and Equipment” in its statement of
financial position. In the Notes, where additional information is
provided, three categories are used: Land and buildings, Fixtures,
fittings and equipment, and Assets in the course of construction.
(b) M&S’s uses the straight-line depreciation method.
(c) M&S depreciates property, plant and equipment as follows:
 Freehold/leasehold buildings with a remaining lease term > 50 years 

Estimated remaining economic lives.
 Leasehold buildings with remaining lease term < 50 years  The shorter
of the useful economic lives or the remaining period of the lease.
 Fixtures, fittings and equipment  325 years according to estimated
economic life of the asset.
(d) M&S’s notes report depreciation expense of £441.7 million for the year
ended March 30, 2019 and £459.6 million for the year ended March 31,
2018.
(e) The statement of cash flows reports the following capital expenditures
(purchase of property, plant, and equipment): for the year ended March
30, 2019, £217.8 million and for the year ended March 31, 2018, £274.9
million.
COMPARATIVE ANALYSIS CASE
(a) Property, plant, and equipment, net of accumulated depreciation:
Puma at 12/31/18 €294.6 million

adidas at 12/31/18 €2,237 million
Percent of total assets:
Puma (€294.6 ÷ €3,207.2) 9.19%

adidas (€2,237 ÷ €15,612) 14.33%
(b) Puma and adidas depreciate property, plant, and equipment principally
by the straight-line method over the estimated useful lives of the
assets. Depreciation expense was reported by Puma and adidas as
follows:
Puma adidas
2018 €81.5 million €409 million
2017 70.4 million 358 million
(c) (1) Asset turnover:
Puma adidas
€4,648.3 €21,915
= 1.533 = 1.479
€2,853.8 + €3,207.2 €14,019 + €15,612
2 2
COMPARATIVE ANALYSIS CASE (Continued)
(2) Profit margin on sales:
Puma adidas
€229.8 €1,704
= 4.94% = 7.78%
€4,648.3 €21,915
(3) Return on assets:
Puma adidas
€229.8 €1,704
= 7.58% = 11.50%
€2,853.8 + €3,207.2 €14,019 + €15,612
2 2
While Puma’s asset turnover ratio is superior to adidas, adidas profit

margin and return on assets is superior to Puma.
(d) Puma’s capital expenditures were €130.2 million in 2018 while adidas’s
capital expenditures were €611 million in 2018.
adidas reported €3 million in capitalized borrowing cost during 2018,

whereas Puma did not report any.
FINANCIAL STATEMENT ANALYSIS CASE
(a) Carrefour used the straight-line method for depreciating its tangible
fixed assets.
(b) Depreciation and amortization charges do not increase cash flow from
operations. In a cash flow statement, these two items are often added
back to net income to arrive at cash flow from operations and therefore
some incorrectly conclude these expenses increase cash flow. What
affects cash flow from operations are cash revenues and cash
expenses. Noncash charges have no effect, except for positive tax
savings generated by these charges.
(c) The schedule of cash flow measures indicates that cash provided by
operations is expected to cover capital expenditures over the next few
years, even as expansion continues to accelerate. It is obvious that
Carrefour’s believes that cash flow measures are meaningful indicators
of growth and financial strength, when evaluated in the context of
absolute dollars or percentages.
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(amounts in €000,000)
(a) Book value = €36 – €10 = €26
Estimated value in use = (€4 × PVF – OA4.5%)

= (€4 × 3.54595)
= €14.1838
Impairment charge = €26 – €19 = €7
Post-impairment book value = €19
(b) (€2.72 × PVF – OA10.6%) = (€2.72 × 7.36009) = €20.021648

Impairment = €26 – €20.0194448 = €5.9805552.
*Use the larger of fair value and value-in-use.
ANALYSIS
If the stores are in the process of being sold, they would likely be considered
‘held for sale’ for financial reporting purposes. If they are held for sale, the
impairment test is based on a lower-of-cost-or net realizable value approach.
Therefore, Electroboy will need to write the stores down to €19 (fair value
less costs of disposal) from €26.0. No depreciation is recorded on assets
held-for-disposal.
PRINCIPLES
Under IFRS, there can be a recovery of impairment loss, as long as the

recovery amount does not result in a carrying value greater than the carrying
value before the original impairment.
RESEARCH CASE
(a) The authoritative guidance for asset impairments is IAS 36: Impairment
of Assets. This Standard shall be applied in accounting for the impair-
ment of all assets, other than:
a. inventories;
b. assets arising from construction contracts;
c. deferred tax assets;
d. assets arising from employee benefits;
e. financial assets that are within the scope of IAS 39 Financial
Instruments: Recognition and Measurement;
f. investment property that is measured at fair value;
g. biological assets related to agricultural activity that are measured at
fair value less costs to sell;
h. deferred acquisition costs, and intangible assets, arising from an
insurer’s contractual rights under insurance contracts within the
scope of IFRS 4 Insurance Contracts; and
i. non-current assets (or disposal groups) classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations (para. 2).
This Standard applies to financial assets classified as:

a. subsidiaries, as defined in IAS 27 Consolidated and Separate
Financial Statements;
b. associates, as defined in IAS 28 Investments in Associates; and
c. joint ventures, as defined in IAS 31 Interests in Joint Ventures.
For impairment of other financial assets, refer to IAS 39 (para. 4).
RESEARCH CASE (Continued)
(b) In assessing whether there is any indication that an asset may be

impaired, an entry shall consider, as a minimum, the following
indications. (para. 12):
External sources of information

a. during the period, an asset’s market value has declined significantly
more than would be expected as a result of the passage of time or
normal use.
b. significant changes with an adverse effect on the entity have taken
place during the period, or will take place in the near future, in the
technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
c. market interest rates or other market rates of return on investments
have increased during the period, and those increases are likely to
affect the discount rate used in calculating an asset’s value in use
and decrease the asset’s recoverable amount materially.
d. the carrying amount of the net assets of the entity is more than its
market capitalisation.
Internal sources of information

e. evidence is available of obsolescence or physical damage of an
asset.
f. significant changes with an adverse effect on the entity have taken
place during the period, or are expected to take place in the near
future, in the extent to which, or manner in which, an asset is used
or is expected to be used. These changes include the asset
becoming idle, plans to discontinue or restructure the operation to
which an asset belongs, plans to dispose of an asset before the
previously expected date, and reassessing the useful life of an asset
as finite rather than indefinite.
g. evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than
expected.
Dividend from a subsidiary, jointly controlled entity or associate

h. for an investment in a subsidiary, jointly controlled entity or
associate, the investor recognizes a dividend from the investment
and evidence is available that:
(i) the carrying amount of the investment in the separate financial
statements exceeds the carrying amounts in the consolidated
financial statements of the investee’s net assets, including
associated goodwill; or
(ii) the dividend exceeds the total comprehensive income of the
subsidiary, jointly controlled entity or associate in the period the
dividend is declared.
The list in paragraph 12 is not exhaustive. An entity may identify other

indications that an asset may be impaired and these would also require
the entity to determine the asset’s recoverable amount or, in the case of
goodwill, perform an impairment test in accordance with paragraphs
80–99 (para. 13).
Evidence from internal reporting that indicates that an asset may be

impaired includes the existence of:
a. cash flows for acquiring the asset, or subsequent cash needs for
operating or maintaining it, that are significantly higher than those
originally budgeted;
b. actual net cash flows or operating profit or loss flowing from the
asset that are significantly worse than those budgeted;
c. a significant decline in budgeted net cash flows or operating profit,
or a significant increase in budgeted loss, flowing from the asset; or
d. operating losses or net cash outflows for the asset, when current
period amounts are aggregated with budgeted amounts for the
future. (para. 14)
Yes, it does appear that Klax should perform an impairment test

because market value of assets are most likely lower than current
carrying value.
(c) Different situations may lead to best evidence of fair value (i.e. could be
market value, revalued asset, etc.).
a. if the asset’s fair value is its market value, the only difference
between the asset’s fair value and its fair value less costs to sell is
the direct incremental costs to dispose of the asset:
(i) if the disposal costs are negligible, the recoverable amount of
the revalued asset is necessarily close to, or greater than, its
revalued amount (i.e., fair value). In this case, after the
revaluation requirements have been applied, it is unlikely that the
revalued asset is impaired and recoverable amount need not be
estimated.
(ii) if the disposal costs are not negligible, the fair value less costs
to sell of the revalued asset is necessarily less than its fair value.
Therefore, the revalued asset will be impaired if its value in use
is less than its revalued amount (i.e., fair value). In this case,
after the revaluation requirements have been applied, an entity
applies this Standard to determine whether the asset may be
impaired.
b. if the asset’s fair value is determined on a basis other than its
market value, its revalued amount (i.e., fair value) may be greater or
lower than its recoverable amount. Hence, after the revaluation
requirements have been applied, an entity applies this Standard to
determine whether the asset may be impaired (para. 5).
GAAP CONCEPTS AND APPLICATION
GAAP11.1. Similarities include:
1. The definition of property, plant, and equipment is
essentially the same under U.S. GAAP and IFRS.
2. Under both U.S. GAAP and IFRS, changes in depreciation
method and changes in useful life are treated in the current
and future periods. Prior periods are not affected.
3. The accounting for plant asset disposals is the same under
U.S. GAAP and IFRS.
4. The accounting for the initial costs to acquire natural
resources is similar under U.S. GAAP and IFRS.
5. Under both U.S. GAAP and IFRS, interest costs incurred
during construction must be capitalized. Recently, IFRS
converged to U.S. GAAP.
6. The accounting for exchanges of non-monetary assets is
essentially the same between U.S. GAAP and IFRS. U.S.
GAAP requires that gains on exchanges of non-monetary
assets be recognized if the exchange has commercial
substance. This is the same framework used in IFRS.
7. U.S. GAAP and IFRS both view depreciation as allocation of
cost over an asset's life. U.S. GAAP and IFRS permit the
same depreciation methods (straight-line, diminishing-
balance, units-of-production).
Differences include:
1. Under U.S. GAAP, component depreciation is permitted but
is rarely used. IFRS requires component depreciation.
2. U.S. GAAP does not permit revaluations of property, plant,
equipment, and mineral resources. Under IFRS, companies
can use either the historical cost model or the revaluation
model.
3. In testing for impairments of long-lived assets, U.S. GAAP
uses a different model than IFRS (details of the U.S. GAAP
impairment test is presented in the About the Numbers
discussion). Under U.S. GAAP, as long as future
undiscounted cash flows exceed the carrying amount of the
asset, no impairment is recorded. The IFRS impairment test
is stricter. However, unlike U.S. GAAP, reversals of
impairment losses are permitted under IFRS.
4. Losses on exchanges of non-monetary assets are
recognized immediately, under U.S. GAAP.
LO: 8, Bloom: K, Difficulty: Moderate, Time: 15-20, AACSB: Diversity, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: Communication
GAAP CONCEPTS AND APPLICATION (Continued)
GAAP11.2 While there is a single key difference, it is an important one–the

issue of revaluations. With respect to revaluations, the IASB and
the FASB are working on a joint project to converge their
conceptual frameworks. One element of that project will
examine the measurement bases used in accounting. It is too
early to say whether a converged conceptual framework will
recommend fair value measurement (and revaluation accounting
for property, plant, and equipment.) However, this is likely to be
one of the more contentious issues, given the long-standing use
of historical cost as a measurement basis in U.S. GAAP.
LO: 8, Bloom: C, Difficulty: Simple, Time: 5-10, AACSB: Diversity, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: Communication
GAAP11.3 Using revaluation accounting, Moncrief would record an

increase of $60,000 ($460,000 - $400,000) in assets and equity.
As a result, the denominator in ROA will be higher. Thus, in
comparing Moncrief to a GAAP company with the same income,
ROE and ROA will be understated – that is, Moncrief will appear
less profitable.
LO: 8, Bloom: AN, Difficulty: Simple, Time: 5-10, AACSB: Analytic, Diversity, AICPA BB: Global and Industry Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: Communication
GAAP11.4 Liberty Kimco

(a) (1) ROA £125 $297
= 2.2% = 6.32%
£5,577 $4,696
Liberty Kimco
(2) Profit Margin £125 $297
= 16.9% = 57.4%
£741 $517
Liberty Kimco
(3) Asset Turnover £741 $517
= .13 = .11
£5,577 $4,696
Based on return on assets (ROA), Kimco is performing better than

Liberty. The main driver for this difference is strong profit margin, which
is over three times that of Liberty. Even though Liberty has a higher
asset turnover (.13 vs. .11), this results in only a 2.2% ROA when
multiplied by the lower profit margin.
GAAP CONCEPTS AND APPLICATION (Continued)
(b) Summary Entry

Land and Buildings.................................................. 1,550
Unrealized Gain on Revaluation..................... 1,550
(c) Relative to U.S. GAAP, an argument can be made that assets and equity
under IFRS are overstated. Note that in the entry in (b) above, the
revaluation adjustment increases Liberty’s asset values and equity. To
make Liberty’s reported numbers comparable to a U.S. company like
Kimco, you would need to adjust Liberty’s assets and equity numbers
downward by the amount of the unrealized gain.
For example, after adjusting Liberty’s assets downward by the amount

of the unrealized gain, Liberty’s ROA increases to:
$125
= 3.45%.
($5,577 – $1,952)
This is still lower than Kimco’s ROA but the gap is narrower after
adjusting for differences in revaluation.
Note to instructors: An alternative way to make Liberty and Kimco compar-

able is to adjust Kimco’s assets to fair values. This approach could be used
to discuss the trade-off between relevance and faithful representation.
LO: 8, Bloom: AN, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, Diversity, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC:
Communication

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CHAPTER 11

Depreciation, Impairments, and Depletion

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

3. Depreciation base. 2, 7 5 8, 14, 18 1, 2, 3,5, 2

4. Errors; changes in 12 7 11, 12, 13, 3, 4 2

5. Depreciation of partial 14 2, 3, 4 3, 4, 5, 6,7, 1, 2, 3,6,

6. Component depreciation. 11 6, 8 9, 16, 17

7. Impairment of value. 15, 16, 17, 9 18, 19, 20 9, 10

8. Depletion. 20, 21, 22, 10 21, 22, 23 11, 12

*10. Revaluation accounting. 25, 26, 28 11 24, 25, 26, 13, 14

*This material is covered in an appendix to the chapter.

1. Describe depreciation concepts and 1, 2, 3, 4, 1, 2, 3, 4, 5, 1, 2, 3, 4, 1, 2, 3, 4

2. Identify other depreciation issues. 2, 3, 4, 6, 3, 4, 5, 6, 7, 1, 2, 3, 4, 2

3. Explain the accounting issues 9 18, 19, 20 9, 10

4. Discuss the accounting procedures 10 21, 22, 23 11, 12

5. Apply the accounting for 11 24, 25, 26, 5, 13, 14

6. Demonstrate how to report and 12 28

*7. Illustrate revaluation accounting 11 29 13, 14

CA11.1 Depreciation basic concepts. Moderate 25–35

3. Disagree. Accounting depreciation is defined as an accounting process of allocating the costs of

8. 2022 Depreciation Expense 2023 Depreciation Expense

**(1 ÷ 20) × 2 = 10%

12. Original estimate: £2,500,000 ÷ 50 = £50,000 per year

14. 1.00 ÷ 4 = .25 straight-line rate × 2 = 50% double-declining rate

27. Asset turnover:

Rate of return on assets:

Depreciation Expense................................................................................. 100,000

Accumulated Depreciation—Plant Assets................................................... 100,000

Plant Assets ($400,000 – $40,000)............................................................. $360,000

BRIEF EXERCISE 11.1

($50,000 – $2,000) × 23,000

($50,000 – $2,000) × 31,000

BRIEF EXERCISE 11.2

BRIEF EXERCISE 11.3

(a) (€80,000 – €8,000) × 8/36* = €16,000

(b) [(€80,000 – €8,000) × 8/36] × 9/12 = €12,000

BRIEF EXERCISE 11.4

(a) €80,000 × .25* = €20,000

(b) (€80,000 × .25) × 3/12 = €5,000

Depreciable Base = ($28,000 + $200 + $125 + $500 + $475) – $3,000 = $26,300.

BRIEF EXERCISE 11.6

Component Depreciation Expense

BRIEF EXERCISE 11.7

Annual depreciation expense: (£8,000 – £1,000)/5 = £1,400

BRIEF EXERCISE 11.8

Component Depreciation Expense

BRIEF EXERCISE 11.10

$400,000 + $100,000 + $80,000 – $160,000

700 × $105 = $73,500

BRIEF EXERCISE 11.11

(a) Accumulated Depreciation—Equipment....... 100,000,000

(b) Depreciation Expense [(¥650,000,000 – 0) ÷ 4]... 162,500,000

(a) Asset turnover:

(b) Profit margin on sales:

(c) Return on assets:

1. 1.109 × .1086 = 12.04%

EXERCISE 11.1 (15–20 minutes)

(a) Straight-line method depreciation for each of Years 1 through 3 =

12/78 × (£518,000 – £50,000) = £72,000 depreciation Year 1

€46,000 × 28 years = €1,288,000 *(10 + 18)