11

Depreciation, Impairments, and Depletion

CHAPTER LEARNING OBJECTIVES

1. Describe depreciation concepts and methods of depreciation.

2. Discuss special depreciation methods and other depreciation issues.
3. Identify the accounting issues related to asset impairment.
4. Explain the accounting procedures for depletion of natural resources.
5. Demonstrate how to report and analyze property, plant and equipment, and natural
resources.

6. Describe income tax methods of depreciation.
*7. Compare the accounting for property, plant, and equipment under GAAP and IFRS.

CHAPTER REVIEW

1. Chapter 11 presents a discussion of the factors involved in the accounting and recording
of depreciation and depletion and the methods of writing off the cost of tangible assets and
natural resources. Depreciation refers to a cost allocation of tangible plant assets. Depletion is
the term used to describe the cost allocation related to natural resources such as timber, oil, or
coal. Amortization is the term used to describe the expiration of intangible assets. In addition to a
thorough discussion of the accounting problems involved, the chapter presents a detailed
analysis and explanation of the various depreciation and write off methods used in practice.

Depreciation Process

2. (L.O. 1) Depreciation is the accounting process of allocating the cost of tangible assets to
expense in a systematic and rational manner to those periods expected to benefit from the use of
the asset. The cost allocation approach is justified because it matches costs with revenues and
because fluctuation in market values is difficult to determine.
3. To compute depreciation, an accountant must establish (a) the depreciable base to be
used for the asset, (b) the asset’s useful life, and (c) the depreciation method to be used.
Determination of the first two factors requires the use of estimates.
4. The depreciable base is the difference between an asset’s cost and its salvage value.
Salvage value is the estimated amount that will be received at the time the asset is sold or
removed from service.
5. The useful life (service life) of a plant asset refers to the number of years that asset is
capable of economically providing the service it was purchased to perform. The service life of an
asset should not be confused with its physical life. For example, a machine may no longer


Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.
11 - 2 Student Study Guide for Intermediate Accounting, 17th Edition

provide a useful service to an organization even though it remains physically functional. Thus, the
estimate of an asset’s service life is dependent upon both the economic factors and the physical
factors related to its use. Economic factors are characterized by inadequacy, supersession, and
obsolescence. Physical factors relate to wear and tear, decay, and casualties that prevent the
asset from performing indefinitely.

Depreciation Methods

6. The depreciation method selected for a particular asset should be systematic and
rational. Depreciation methods may be classified as:

A. Activity method.
B. Straight-line method.
C. Decreasing charge methods.
a. Sum-of-the-years’-digits.
b. Declining-balance method.
D. Special depreciation methods.
a. Group and composite methods.
b. Hybrid or combination methods.

7. The following information for a piece of machinery will be used to illustrate some of the
depreciation methods discussed in the following paragraphs.
Cost of machine $260,000
Estimated useful life 10 years
Estimated salvage value $20,000
Productive life in hours 60,000 hours
8. When the activity method (units of use or production) is used, depreciation is assumed
to be a function of productivity rather than the passage of time. This method is most appropriate
for assets such as machinery or automobiles where depreciation can be based on units produced
or miles driven. One problem associated with the use of this method concerns a before-the-fact
estimation of the total output the asset will achieve during its useful life.
Illustration
Assume the machine was used for 6,800 hours in the first year of its useful life.
(Cost less salvage) ´ hours this year
= Depreciation Charge
Total estimated hours

($260 - $20,000 ´ 6,800)

= $27,200
60,000
9. Use of the straight-line method results in a uniform charge to depreciation expense
during each year of an asset’s service life. This method is based upon the assumption that the
decline in an asset’s usefulness is the same each year. Although the straight-line method is easy
to use, it rests on an assumption that, in most situations, is not realistic.
Illustration
Cost less salvage
= Depreciation Charge
Estimated service life
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 3

($260,000 - $20,000)
= $24,000
10
10. The decreasing charge (accelerated depreciation) methods result in a higher
depreciation cost during the early years of an asset’s service life and lower charges in later years.
This approach is justified on the basis that assets lose a greater amount of service potential in
earlier years and thus depreciation should be higher.
11. The sum-of-the-years’-digits method and the declining-balance method are the two
most often used decreasing charge methods. The sum-of-the-years’ digits method requires
multiplication of the depreciable base by a fraction that decreases during each year of an asset’s
service life. The declining-balance method requires use of a constant percentage applied to an
asset’s book value (cost less accumulated depreciation). Salvage value is initially ignored
under the declining-balance method.
Illustration
Sum-of-Years’ Digits
(Cost - Salvage Value) ´ Depreciation Fraction = Depreciation Charge

($260,000 - $20,000) ´ 10 / 55* = $43,636.36

n(n+1)
2
, where n = estimated useful life

Declining-Balance
The declining-balance method utilizes a depreciation rate that is some multiple of the straight-line
method. One popular method is twice the straight-line rate. Thus, in our example the 10-year
asset life would translate into a 20% declining rate.
Beginning Rate on
of the Year Declining Depreciation
Book Value × Balance = Charge
Year 1 $260,000 × 20% = $52,000
Year 2 $208,000 × 20% = $41,600
12. (L.O. 2) Group and composite methods involve averaging the service life of many
assets and applying depreciation as though a single unit existed. The composite approach refers
to a collection of dissimilar assets, whereas the group approach refers to a collection of assets
with similar characteristics. The method of computation for group or composite is essentially the
same: find an average and depreciate on that basis. For example, the following assets would
have the following composite rate and life.
Original Salvage Depreciable Useful Depreciation
Asset Cost Value Cost Life (Straight-Line)
A $ 65,000 $ 5,000 $ 60,000 5 yrs. $12,000
B 148,000 18,000 130,000 10 yrs. 13,000
C 95,000 11,000 84,000 12 yrs. 7,000
$308,000 $34,000 $274,000 $32,000
Composite Rate: $32,000/308,000 = 10.39%
Composite Life: $274,000/32,000 = 8.56 years
These assets will be depreciated at $32,000 per year for 8.56 years.
11 - 4 Student Study Guide for Intermediate Accounting, 17th Edition

13. In general, depreciation should be based on the number of months an asset is used
during an accounting period. If a decreasing charge depreciation method is used for assets
purchased during an accounting period, a slight modification is appropriate. When this situation
occurs, determine depreciation expense for the full year and prorate the expense between the
two periods involved. This process continues throughout the service life of the asset. For
example, assume an asset with a 5-year useful life and a depreciable cost of $45,000 is
purchased on October 1. At the end of the first year the depreciation charge under sum-of-the-
years’-digits method would be:
1st Full Year: $45,000 × 5/15 = $15,000
2nd Full Year: $45,000 × 4/15 = $12,000
Year 1 (10/1 to 12/31): $15,000 × 1/4 = 3,750
Year 2: ($15,000 × 3/4) + ($12,000 × 1/4)
$11,250 + $3,000 = $14,250
14. Depreciation expense reduces net income for the accounting period in which it is recorded
even though a current cash outflow is not involved. As such, it is added back when computing
cash from operating activities using the indirect method. However, depreciation should not be
considered a source of cash. Cash is generated by revenues, not accounting procedures.
15. The estimates involved in the depreciation process are sometimes subject to revision as a
result of unanticipated occurrences. Such revisions are classified as changes in accounting
estimates and should be handled in the current and prospective periods.

Impairments

16. (L.O. 3) The process to determine an impairment loss is (a) review events for possible
impairment, (b) if events suggest impairment, determine if the sum of the expected future net
cash flows is less than the carrying amount, if so, then (c) the loss is the amount by which the
carrying amount of the asset is greater than the fair value of the asset. If an impaired asset is
expected to be disposed of, it should be recorded at the lower of cost or net realizable value, and
it is not depreciated.
17. If an impairment loss is recorded and if an asset is considered long-lived, the reduced
carrying amount is now considered its new cost basis and no write-up is allowed. If an impaired
asset is held for disposal, it can be written up or down as long as the write-up is never greater
than the carrying amount of asset at the time of the original impairment.

Depletion

18. (L.O. 4) Depletion refers to the process of allocating the cost of natural resources
(wasting assets). The depletion base for natural resources includes acquisition costs,
exploration costs, intangible development costs, and restoration costs reduced by any
residual value related to the land. Tangible assets used in extracting natural resources are
normally set up in a separate account and depreciated individually.
19. Depletion is normally based on the number of units extracted during the period, which
corresponds to the activity depreciation method discussed earlier. A major problem one faces
when computing depletion is estimating recoverable reserves.
20. Companies in the oil and gas industry may currently account for the costs using either the
successful efforts approach or the full costing approach. Both successful efforts and full
costing are historical cost approaches. The SEC once favored the development of a value-based
accounting method for companies in the oil and gas industry known as Reserve Recognition
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 5

Accounting (RRA). However, the development of RRA was abandoned due to practical
considerations.

Disclosures

21. (L.O. 5) The basis for valuing property, plant, equipment, and natural resources, which is
normally historical cost, should be disclosed in the financial statements along with any pledges,
liens, and other commitments related to these assets. Normally, assets not used in a productive
capacity (held for future use or as an investment) should be segregated from assets used in
operations and classified as “Other Assets.” Financial statement disclosures related to
depreciation include:

a. Depreciation expense for the period.

b. Balances of major classes of depreciable assets, by nature and function.
c. Accumulated depreciation, either by major classes of depreciable assets or in total.
d. A general description of the method or methods used in computing depreciation with
respect to major classes of depreciable assets.

22. Both publicly traded and privately held companies engaged in significant oil and gas
producing activities are required to disclose (a) the basic method of accounting for those costs
incurred in oil and gas producing activities and (b) the manner of disposing of costs relating to oil
and gas producing activities. Public companies must also disclose information about reserve
quantities; capitalized costs; acquisition, exploration, and development activities; and a
standardized measure of discounted future net cash flows related to proven oil and gas reserve
quantities.

Income Tax Depreciation

*23. (L.O. 6) For assets acquired before 1981, depreciation for income tax purposes is based
on straight-line, sum-of-the-years’-digits, and declining-balance methods. For assets purchased in
the years 1981 through 1986 the Accelerated Cost Recovery System (ACRS) of depreciation is
used. A Modified Accelerated Cost Recovery System, known as MACRS, was enacted by
Congress in the Tax Reform Act of 1986. It applies to depreciable assets placed in service in
1987 and later. Three major differences exist between the computation of depreciation under
MACRS and GAAP: (a) a mandated tax life, which is generally shorter than the economic life, (b)
cost recovery on an accelerated basis, and (c) an assigned salvage value of zero. MACRS
assigns assets to property classes which indicate the depreciable tax life of the assets in each
class. The depreciable tax lives range from 3-year property to 39-year property.

IFRS Insights

*24. (L.O. 7) IFRS requires component depreciation; under GAAP, component depreciation is
permitted but is rarely used. Under IFRS, companies can use either the historical cost model or
the revaluation model; GAAP does not permit revaluations of property, plant, and equipment or
mineral resources. In testing for impairments of long-lived assets, GAAP uses a two-step model
to test for impairments; the IFRS impairment test is stricter.
11 - 6 Student Study Guide for Intermediate Accounting, 17th Edition

GLOSSARY

*Accelerated Cost Recovery A tax depreciation method used for assets purchased in the
System (ACRS). years 1981 through 1986.
Activity method (variable A depreciation method in which depreciation is a function of
charge approach). use or productivity instead of the passage of time.
Amortization. The accounting process of allocating the cost of intangible
assets (i.e., patents and goodwill) to expense.
Composite approach. A depreciation method that depreciates a collection of assets
that are heterogeneous and have different lives.
Composite depreciation rate. Depreciation per year divided by the total cost of the assets.
Declining-balance method. A depreciation method that applies a constant rate to the
declining book value of the asset and produces a decreasing
annual depreciation amount over the useful life of the asset.
Decreasing charge method A depreciation method which provides for a higher
(accelerated depreciation). depreciation cost in the earlier years and lower charges in
later periods.
Depletion. The accounting process of allocating the cost of natural
resources (i.e., timber, gravel, oil, and coal) to expense.
Depreciation. The accounting process of allocating the cost of tangible
assets to expense in a systematic and rational manner to
those periods expected to benefit from the use of the asset.
Development costs. The costs incurred to extract natural resources and to get
them ready for production or shipment.
Economic factors. When an asset is retired because of inadequacy,
supersession or obsolescence.
Exploration costs. The costs incurred to find natural resources.
Full cost concept. Accounting for exploration costs where unsuccessful ventures
are capitalized with successful ventures.
Group method. A depreciation method that depreciates a collection of assets
that are similar in nature.
Impairment. When the carrying amount of an asset is not recoverable and
therefore a write-off is needed.
Inadequacy. An economic factor for retiring an asset because the asset
ceased to be useful to an enterprise due to the demands of
the firm having increased.
Liquidating dividend. A dividend which is a return of capital to the shareholder.
*Modified Accelerated Cost A tax depreciation method used for assets placed in service
Recovery System (MACRS). in 1987 and thereafter.
Natural resources. Wasting assets such as petroleum, minerals, and timber.
Obsolescence. An economic factor for retiring an asset that does not
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 7

specifically relate to the factors of inadequacy or

supersession.
Physical factors. Wear, tear, decay, and casualties that make it difficult for an
asset to perform indefinitely.
Recoverability test. A screening device used to determine whether an impairment
has occurred.

Reserve Recognition An accounting method whereby as soon as a company

Accounting. discovers oil or gas, it reports the value of the oil or gas on
the balance sheet and on the income statement.
Restoration costs. The costs incurred to restore property to its natural state after
extraction of natural resources has occurred.
Salvage value. The estimated amount that will be received at the time the
asset is sold or removed from service.
Straight-line method. A depreciation method in which periodic depreciation is the
same throughout the service life of the asset.
Sum-of-the-years’-digits A depreciation method that produces decreasing periodic
method. depreciation by applying a decreasing fraction to the
depreciable cost of the asset.
Supersession. An economic factor for retiring an asset due to the
replacement of one asset with another more efficient and
economical asset.
Successful efforts concept. Accounting for exploration costs where only successful
ventures are capitalized.

CHAPTER OUTLINE

Fill in the outline presented below.

(L.O. 1) The Concept of Depreciation

Factors Involved in the Depreciation Process

Depreciable Base

Estimation of Service Lives

11 - 8 Student Study Guide for Intermediate Accounting, 17th Edition

Methods of Depreciation

Activity method

Chapter Outline (continued)

Straight-line method

Sum-of-the-years’-digits method

Declining-balance method

(L.O. 2) Special depreciation methods

Group and composite methods

Hybrid or combination methods

Special depreciation issues

Depreciation of partial periods

Depreciation and replacement of fixed assets

Revision of depreciation rates

(L.O. 3) Impairments
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 9

Recoverability test

Calculation of impairment loss

Chapter Outline (continued)

Restoration of impairment loss

Assets to be disposed of

(L.O. 4) Depletion

Establishing a depletion base

Acquisition costs

Exploration costs

Development costs

Restoration costs

Write-off of resource cost

Controversy of full cost concept vs. successful efforts concept

(L.O. 5) Presentation and Analysis of Property, Plant, and Equipment, and Natural Resources
11 - 10 Student Study Guide for Intermediate Accounting, 17th Edition

*(L.O. 6) Income Tax Depreciation

*(L.O. 7) IFRS Insights

REVIEW QUESTIONS AND EXERCISES

TRUE-FALSE

Indicate whether each of the following is true (T) or false (F) in the space provided.
_____ 1. (L.O. 1) The accounting concept of depreciation reflects the decline in value
associated with a plant asset.
_____ 2. (L.O. 1) An asset’s cost less its salvage value is referred to as the depreciable
base.
_____ 3. (L.O. 1) Physical factors such as wear and tear set the outside limit for the service
life of an asset.
_____ 4. (L.O. 1) Whenever the economic nature of the asset is the primary determinant of
service life, maintenance plays an extremely vital role in prolonging service life.
_____ 5. (L.O. 1) Replacing a black and white monitor with a color monitor for a computer is
an example of supersession.
_____ 6. (L.O. 1) Estimation and judgment are the primary means through which the service
life of an asset is determined.
_____ 7. (L.O. 1) One problem associated with the activity method of depreciation concerns
estimating the total units of output an asset will produce.
_____ 8. (L.O. 1) Companies that desire low depreciation during periods of low productivity
and high depreciation during high productivity either adopt or switch to a declining-
balance method.
_____ 9. (L.O. 1) The straight-line method considers depreciation a function of time rather
than a function of usage.
_____ 10. (L.O. 1) The straight-line depreciation method is used most often in actual practice.
This is because the assumptions upon which it is based apply to most plant
assets.
_____ 11. (L.O. 1) Accelerated depreciation methods accomplish the objective of writing an
asset off over a shorter period of time than its useful life.
_____ 12. (L.O. 1) Under the declining-balance depreciation method, salvage value is
considered only in computing the amount of depreciation for the final year(s) of an
asset’s service life.
_____ 13. (L.O. 2) Under the group and composite methods, the term group refers to a
collection of assets that are similar in nature; composite refers to a collection of
assets that are dissimilar in nature.
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 11

_____ 14. (L.O. 2) The composite depreciation rate is determined by dividing the depreciation
per year by the total cost of the assets.
_____ 15. (L.O. 2) If one of the estimates used in computing depreciation is subsequently
found to require adjustments, no change in prior years’ financial statements is
required.
_____ 16. (L.O. 3) When determining whether an asset has been impaired, the recoverability
test compares discounted future net cash flows to the carrying amount of the
asset.
_____ 17. (L.O. 3) The impairment loss is the amount by which the carrying amount of the
asset is greater than the market value or present value of the asset.
_____ 18. (L.O. 3) Losses or gains relating to impaired assets intended to be disposed of
should be reported as part of income from continuing operations.
_____ 19. (L.O. 4) Depletion is the systematic allocation of the cost of natural resources
(wasting assets).
_____ 20. (L.O. 4) Development costs include tangible equipment used for transportation and
other heavy equipment necessary to extract a natural resource and get it ready for
production or shipment.
_____ 21. (L.O. 4) The full costing approach, related to accounting for exploration costs,
requires that the full cost of exploration be charged against income in the year it is
incurred.
_____ 22. (L.O. 4) The computation of depletion is essentially the same as the activity
method of depreciation.
_____ 23. (L.O. 4) Reserve recognition accounting is specifically related to the oil and gas
industry.
_____ *24. (L.O. 6) The Internal Revenue Code allows the use of an accelerated depreciation
method for tax purposes as long as the use of the method does not cause the
company to report a net loss.
_____ *25. (L.O. 6) In recording depreciation for tax purposes, companies can use any
method as long as the amount reported on the tax return exceeds the amount
recorded for financial statement purposes.

MULTIPLE CHOICE

Select the best answer for each of the following items and enter the corresponding letter in the
space provided.
_____ 1. (L.O. 1) Which of the following most accurately reflects the concept of depreciation
as used in accounting?
A. The process of charging the decline in value of an economic resource to
income in the period in which the benefit occurred.
B. The process of allocating the cost of tangible assets to expense in a
systematic and rational manner to those periods expected to benefit from the
use of the asset.
C. A method of allocating asset cost to an expense account in a manner which
closely matches the physical deterioration of the tangible asset involved.
11 - 12 Student Study Guide for Intermediate Accounting, 17th Edition

D. An accounting concept that allocates the portion of an asset used up during

the year to the contra asset account for the purpose of properly recording the
fair market value of tangible assets.
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 13

_____ 2. (L.O. 1) The major difference between the service life of an asset and its physical
life is that:
A. service life refers to the time an asset will be used by a company and physical
life refers to how long the asset will last.
B. physical life is the life of an asset without consideration of salvage value and
service life requires the use of salvage value.
C. physical life is always longer than service life.
D. service life refers to the length of time an asset is of use to its original owner,
while physical life refers to how long the asset will be used by all owners.
_____ 3. (L.O. 1) The economic factors related to an asset’s service life include:
A. obsolescence.
B. wear and tear.
C. decay.
D. unexpected casualties.

_____ 4. (L.O. 1) The activity method of depreciation (often called the variable charge
approach) assumes that depreciation is a function of:
Productivity Passage of Time
A. Yes Yes
B. No No
C. Yes No
D. No Yes
_____ 5. (L.O. 1) Which of the following is a realistic assumption of the straight-line method
of depreciation?
A. The asset’s economic usefulness is the same each year.
B. The repair and maintenance expense is essentially the same each period.
C. The rate of return analysis is enhanced using the straight-line method.
D. Depreciation is a function of time rather than a function of usage.
_____ 6. (L.O. 1) Which of the following statements is the assumption on which straight-line
depreciation is based?
A. The operating efficiency of the asset decreases in later years.
B. Service value declines as a function of time rather than use.
C. Service value declines as a function of obsolescence rather than time.
D. Physical wear and tear are more important than economic obsolescence.
_____ 7. (L.O. 1) A graph is set up with “depreciation expense” on the vertical axis and
“time” on the horizontal axis. Assuming linear relationships, how would the graphs
for declining-balance and straight-line, respectively, be drawn?
A. Sloping down to the right and vertically.
B. Sloping up to the right and vertically.
C. Sloping down to the right and horizontally.
D. Sloping up to the right and horizontally.

_____ 8. (L.O. 1) Which of the following depreciation methods does not consider salvage
value in computing the total depreciation to be taken?
A. Straight-line.
B. Sum-of-years’-digits.
C. Declining-balance.
D. Activity or production.
11 - 14 Student Study Guide for Intermediate Accounting, 17th Edition

_____ 9. (L.O. 1) SL and YD Companies purchase identical equipment having an estimated

service life of 5 years, with no salvage value. SL Company uses the straight-line
depreciation method; YD Company uses the sum-of-the-years’ digits method.
Assuming that the companies are identical in all other respects:
A. if both companies keep the asset for 5 years, YD Company’s 5-year total for
depreciation expense will be greater than SL Company’s 5-year total.
B. if the asset is sold after 3 years, SL Company is more likely to report a gain on
the transaction than YD Company.
C. SL Company’s depreciation expense will be higher during the 1st year than
YD’s.
D. SL Company’s net income will be lower during the 4th year than YD
Company’s.
_____ 10. (L.O. 1) Each year Abner Corporation sets aside an amount of cash equal to
depreciation expense on its only machine. When the asset is completely
depreciated, the cash fund will allow the corporation to buy a new machine if:
A. prices rise throughout the life of the property.
B. an accelerated depreciation method was used.
C. prices remain reasonably constant during the life of the property.
D. the straight-line depreciation method is used.
_____ 11. (L.O. 1) When depreciation is computed for partial periods under a decreasing
charge depreciation method, it is necessary to:
A. charge a full year’s depreciation to the year of acquisition.
B. determine depreciation expense for the full year and then prorate the expense
between the two periods involved.
C. use the straight-line method for the year in which the asset is sold or otherwise
disposed of.
D. use a salvage value equal to the first year’s partial depreciation charge.
_____ 12. (L.O. 2) Composite or group depreciation is a depreciation system whereby:
A. the years of useful life of the various assets in the group are added together
and the total divided by the number of items.
B. the cost of individual units within an asset group is charged to expense in the
year a unit is retired from service.
C. a straight-line rate is computed by dividing the total of the annual depreciation
expense for all assets in the group by the total cost of the assets.
D. the original cost of all items in a given group or class of assets is retained in
the asset account and the cost of replacements is charged to expense when
they are acquired.
_____ 13. (L.O. 2) The Archer Company purchased a tooling machine in 2010 for $30,000.
The machine was being depreciated on the straight-line method over an estimated
useful life of 20 years, with no salvage value. At the beginning of 2020, when the
machine had been in use for 10 years, the company paid $5,000 to overhaul the
machine. As a result of this improvement, the company estimated that the useful
life of the machine would be extended an additional 5 years. What should be the
depreciation expense recorded for this machine in 2020?
A. $1,000.
B. $1,333.
C. $1,500.
D. $1,833.
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 15

_____ 14. (L.O. 3) Thucydides Company purchased a new machine on May 1, 2010, for
$25,000. At the time of acquisition, the machine was estimated to have a useful life
of 10 years and an estimated salvage value of $1,000. The company has recorded
monthly depreciation using the straight-line method. On March 1, 2019, the
machine was sold for $800. What should be the loss recognized from the sale of
the machine?
A. $ 0.
B. $2,000.
C. $3,000.
D. $3,400.
_____ 15. (L.O. 2) Each year a company has been investing an increasing amount in
machinery. Because there are a large number of small items with relatively similar
useful lives, the company has been applying straight-line depreciation method at a
uniform rate to the machinery as a group. The ratio of this group’s total
accumulated depreciation to the total cost of the machinery has been steadily
increasing and now stands at .75 to 1. The most likely explanation of this
increasing ratio is that:
A. the estimated average useful life of the machinery is greater than the actual
average useful life.
B. the estimated average useful life of the machinery is equal to the actual
average useful life.
C. the estimated average useful life of the machinery is less than the actual
average useful life.
D. the company has been retiring fully depreciated machinery that should have
remained in service.
_____ 16. (L.O. 2) The estimated life of a building that has been depreciated for 30 of its
originally estimated life of 50 years has been revised to a remaining life of 10
years. On the basis of this information the accountant should:
A. continue to depreciate the building over the original 50-year life.
B. depreciate the remaining book value over the remaining life of the asset.
C. adjust accumulated depreciation to its appropriate balance, through net
income, based on a 40-year life, and then depreciate the adjusted book value
as though the estimated life had always been 40 years.
D. adjust accumulated depreciation to its appropriate balance, through retained
earnings, based on a 40-year life, and then depreciate the adjusted book value
as though the estimated life had always been 40 years.
_____ 17. (L.O. 2) Plato Corporation purchased a machine with a cost of $165,000 and a
salvage value of $9,000 on April 1, 2019. The machine will be depreciated over a
12 year useful life using the sum-of-years’-digits method. The amount of
depreciation Plato Corporation would record for the year ended 12/31/20 would be:
A. $22,000.
B. $24,000.
C. $16,500.
D. $22,500.
11 - 16 Student Study Guide for Intermediate Accounting, 17th Edition

_____ 18. (L.O. 3) An impairment in the value of property, plant, and equipment is recorded
by recognizing a:
Reduction in Asset
Loss
Book Value
A. Yes No
B. Yes Yes
C. No Yes
D. No No

_____ 19. (L.O. 3) Maimonides Inc. bought a machine on January 1, 2010 for $100,000. The
machine had an expected life of 20 years and was expected to have a salvage
value of $10,000. On July 1, 2020, the company reviewed the potential of the
machine and determined that its undiscounted future net cash flows totaled
$50,000 and its discounted future net cash flows totaled $35,000. If no active
market exists for the machine and the company does not plan to dispose of it,
what should Maimonides record as an impairment loss on July 1, 2020 assuming
the straight-line method is used?
A. $ 0
B. $ 2,750
C. $ 5,000
D. $17,750
_____ 20. (L.O. 3) On December 31, 2019, Aquinas Company had equipment that had a
carrying amount of $300,000 which the company wrote down to its $250,000 fair
value. At the end of 2020 it was determined that the fair value of the equipment
had risen to $320,000. At December 31, 2020, assuming Aquinas does not intend
to dispose of the equipment, how should Aquinas record the change in fair value of
the equipment?
A. The carrying amount of the equipment should not change except for the
depreciation taken in 2020.
B. The equipment should reflect the new cost basis of $300,000.
C. The equipment should reflect the new cost basis of $320,000.
D. The equipment should reflect the new cost basis of $270,000.
_____ 21. (L.O. 4) Of the following costs related to the development of natural resources,
which one is not a part of depletion cost?
A. Acquisition cost of the natural resource deposit.
B. Exploration costs.
C. Tangible equipment costs associated with machinery used to extract the
natural resource.
D. Intangible development costs such as drilling costs, tunnels, and shafts.
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 17

_____ 22. (L.O. 4) The Xenophon Company acquired a tract of land containing an extractable
natural resource. Xenophon Company is required by its purchase contract to
restore the land to a condition suitable for recreational use after it extracts the
natural resource. Geological surveys estimate that recoverable reserves will be 3
million tons and that the land will have a value of $600,000 after restoration.
Relevant cost information follows:
Land .................................................... $6,000,000
Restoration .......................................... 900,000
Geological surveys .............................. 300,000
If Xenophon Company maintains no inventories of extracted material, what should
be the charge to depletion expense per ton of material extracted?
A. $1.80.
B. $1.90.
C. $2.00.
D. $2.20.
_____ 23. (L.O. 4) In January 2020, the Lucky Mine Corporation purchased a mineral mine
for $3,400,000 with removable ore estimated by geological surveys at 4,000,000
tons. The property has an estimated value of $200,000 after the ore has been
extracted. The company incurred $800,000 of development costs preparing the
mine for production. During 2020, 400,000 tons were removed and 375,000 tons
were sold. What is the amount of depletion cost that Lucky Mine should record for
2020?
A. $375,000
B. $393,750
C. $400,000
D. $420,000
_____ 24. (L.O. 5) Which of the following disclosures is not required in the financial
statements regarding depreciation?
A. Accumulated depreciation, either by major classes of depreciable assets or in
total.
B. Details demonstrating how depreciation was calculated.
C. Depreciation expense for the period.
D. Balances of major classes of depreciable assets, by nature and function.
_____ *25. (L.O. 6) Which of the following is not one of the differences between the
computation of depreciation under GAAP and the computation under the Modified
Accelerated Cost Recovery System (MACRS)?
A. The recording of depreciation expense is taken directly to retained earnings
under the MACRS method.
B. A mandated tax life is used which is generally shorter than the economic life of
the asset.
C. Cost recovery is on an accelerated basis under the MACRS.
D. An assigned salvage value of zero is used under the MACRS.
11 - 18 Student Study Guide for Intermediate Accounting, 17th Edition

REVIEW EXERCISES

1. (L.O. 1) Augustine Corporation purchased two separate pieces of equipment in March

2013. Facts related to the two items are noted below. Augustine Corporation follows a policy of
recording a full-year’s depreciation in the year of acquisition and no depreciation in the year of
disposition.
Salvage Useful Depreciation Annual
Item Cost Value Life Method Repair Cost
A $113,000 $ 5,000 8 yrs. Sum-of-year’s-digits $1,500
B $140,000 $10,000 10 yrs. Declining-balance $2,500
Because of a lack of experience, the bookkeeper for the corporation made the following entry for
the repair cost each year after depreciation was recorded.
Dr. Accumulated Depreciation
Cr. Cash
As a result, when item A was sold in July 2018 for $25,000, the bookkeeper recorded a loss on
the sale. Also, when item B was sold in September 2020 for $40,000, the bookkeeper also
recorded a loss. (Assume the bookkeeper ignored the debits to Accumulated Depreciation in
computing annual depreciation expense on each asset.)
Instructions:

a. What journal entry did the bookkeeper record for each sale, assuming the only error
was improperly charging the repair expense to accumulated depreciation.
b. What entry should have been made for each sale?

a.
General Journal
J1
Date Account Title Debit Credit
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 19

b.
General Journal
J1
Date Account Title Debit Credit
11 - 20 Student Study Guide for Intermediate Accounting, 17th Edition

2. (L.O. 1) Aristotle Company acquired a machine on July 1, 2020, at a cost of $32,000. The
machine has an estimated salvage value of $2,000 at the end of its 4-year useful life. Aristotle
Company uses the calendar year as its accounting period.
Instructions:
Using the depreciation methods indicated, compute the depreciation expense for years 2020
and 2021, and the book value of the machine at December 31, 2021.
__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

Depreciation Method Depreciation Depreciation Book Value

Expense 2020 Expense 2021 December 31, 2021
Straight-line __________ __________ __________
Sum-of-the-years’-digits __________ __________ __________
Declining-balance (200%) __________ __________ __________
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 21

3. (L.O.2) For the following group of assets, compute the composite depreciation rate, the
composite life, and the amount of depreciation recorded in the first year.
Original Salvage Estimated
Asset Cost Value Life (yr.)
A $11,000 $500 5
B 7,000 200 4
C 12,500 800 3
D 16,000 1,000 6
If asset B is sold for $1,000 at the end of 3 years, what journal entry should be recorded?
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
_________ _________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
_
General Journal
J1
Date Account Title Debit Credit
11 - 22 Student Study Guide for Intermediate Accounting, 17th Edition

4. (L.O. 3) Alfarabi Company has an asset that had an original cost of $560,000 and
depreciation taken to date of $240,000. Management of Alfarabi Company has decided that the
asset has suffered an impairment and its expected future net cash flows total $80,000. Further,
the asset has a remaining useful life of 3 years and a salvage value of $15,000. No active market
exists for the asset and its present value of expected future net cash flows is $61,000.
Instructions:

a. Prepare the journal entry Alfarabi Company would make to record the impairment in
the value of the asset.
b. How is the gain or loss on this impairment reported in the income statement?

a.
General Journal
J1
Date Account Title Debit Credit

b.
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
_________ _________________________________________________________________
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 23

5. (L.O. 4) Cicero Oil Company acquired the rights to explore for oil on a 2,000-acre plot of
land in the Oklahoma Panhandle. The rights cost $80,000, and the exploration costs associated
with the discovery of a major oil deposit amounted to $125,000. The company incurred $980,000
in developmental costs, of which $250,000 were for tangible equipment. This equipment has
useful life of 10 years and should be of use in future exploration ventures. During the first year the
company extracted 175,000 of the estimated 2.5 million barrels of oil related to the discovery.
Instructions:
Prepare the journal entry for the first year’s depletion and show how the above-mentioned
assets would be reported in the balance sheet at the end of the first year.

General Journal
J1
Date Account Title Debit Credit

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_________ ____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
11 - 24 Student Study Guide for Intermediate Accounting, 17th Edition

_____________________________________________________________________________

SOLUTIONS TO REVIEW QUESTIONS AND EXERCISES

TRUE-FALSE

1. (F) Depreciation is not a matter of valuation but a means of cost allocation in

accounting. The concept is defined as the systematic allocation of the cost of an
asset.
2. (T)
3. (T)
4. (F) When the economic nature of the asset is the primary determinant of service life,
functional factors rather than physical factors (wear and tear) cause the asset to be
retired. Functional factors (inadequacy, supersession, and obsolescence) cannot be
reversed by repairs and maintenance.
5. (T)
6. (T)
7. (T)
8. (F) Companies that desire low depreciation during periods of low productivity and high
depreciation during high productivity either adopt or switch to an activity method.
9. (T)
10. (F) The straight-line method is widely employed in practice because of its simplicity. The
major objection to the straight-line method is that it rests on tenuous assumptions
that in most situations are not realistic. The major assumptions are that (a) the
asset’s economic usefulness is the same each year and (b) the repair and
maintenance expense is essentially the same each period.
11. (F) Accelerated depreciation methods provide for a higher depreciation cost in the
earlier years and lower charges in later periods. The estimated useful life of an asset
is unaffected by the depreciation method used.
12. (T)
13. (T)
14. (T)
15. (T)
16. (F) When determining whether an asset has been impaired, the recoverability test
compares expected future net cash flows (undiscounted) to the carrying amount of
the asset.
17. (T)
18. (T)
19. (T)
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 25

20. (F) Development costs only include intangible development costs for such items as
drilling costs, tunnels, shafts, and wells.
21. (F) Under the full costing approach, all costs, whether related to successful or
unsuccessful projects, are capitalized and charged against future operations.
22. (T)
23. (T)
*24. (F) The IRS adopted an accelerated depreciation system known as the modified
accelerated cost recovery system (MACRS). Under this method, the taxpayer
determines depreciation expense for an asset by applying a statutory percentage to
the historical cost of the property. The use of MACRS is not affected by the reporting
of a net loss.
*25. (F) For tax purposes companies are required to use a Modified Accelerated Cost
Recovery System (MACRS) in computing depreciation. The rate of acceleration
depends upon the useful life of the asset being depreciated.

MULTIPLE CHOICE

1. (B) Depreciation is a process of systematic and rational allocation of an asset’s cost to

the periods benefitted by the use of that asset. A decline in value is not a part of the
depreciation process, and depreciation does not necessarily match the physical
deterioration of the asset. Also, depreciation is a concept most concerned with
allocating cost to expense rather than a focus on recording fair market value of an
asset on the balance sheet.
2. (A) Service life is the period of time an asset will provide productive service to a
company. Physical life indicates how long an asset may be physically capable of
producing a product or being used. The major difference is that an asset with
physical life may not be economical to use and, as such, would not be of service to
an entity. Salvage value is not a relevant issue in this distinction. Also, while physical
life may be longer than service life, it is not necessarily always longer. The
distinction of original owner vs. future owners is not a major element of the
difference.
3. (A) The economic factors related to an asset’s service life include: inadequacy,
supersession, and obsolescence. The items listed in alternatives (B), (C), and (D)
refer to the physical factors related to an asset’s physical life.
4. (C) The activity method assumes that depreciation is a function of productivity rather
than the passage of time. The life of the asset is considered in terms of either the
output it provides (units of production) or an input measure such as number of hours
it works.
5. (D) Alternatives A, B, and C reflect problems with use of the straight-line method of
depreciation. An asset’s economic usefulness is rarely the same each year, and with
most assets, repair and maintenance costs increase as the asset gets older. Also,
rate of return analysis is distorted under the straight-line method as well as other
methods. The one true statement concerns the fact that the straight-line method is a
function of time rather than a function of usage.
11 - 26 Student Study Guide for Intermediate Accounting, 17th Edition

6. (B) When the service value of an asset declines as a function of time rather than use, it
is rational to allocate the asset’s cost using the straight-line method. Answer (A) is
incorrect because an accelerated-depreciation method gives a better allocation of an
asset’s cost when the operating efficiency of the asset decreases in later years.
Answer (D) is incorrect because an activity depreciation method gives a better
allocation of an asset’s cost when physical wear and tear are more important than
economic obsolescence. Answer (C) is incorrect because, although straight-line
depreciation is commonly used in practice to depreciate assets when their service
value declines as a function of obsolescence rather than time, this is done as a
practical expedient. This practice does not provide the assumption on which straight-
line depreciation is based.
7. (C) Declining-balance depreciation results in the highest depreciation expense the first
year of an asset’s life and then decreases each year of the asset’s life thereafter.
Thus, the graph of the declining-balance depreciation would be sloping down to the
right. Since straight-line depreciation is the same amount each year of an asset’s
life, the straight-line depreciation graph would be horizontal.
8. (C) The declining-balance method does not deduct salvage value in the computation of
total deprecation to be taken. The declining-balance rate is multiplied by the book
value (cost less accumulated depreciation) at the beginning of each period. By
applying the declining-balance rate to the book value each year, a decreasing
charge is recorded each year. Depreciation on the asset continues until the asset’s
book value is equal to its salvage value.
9. (D) If both companies are identical in all respects other than depreciation, then the
company using the straight-line depreciation method (SL) will have a higher
depreciation expense in the 4th year of the asset’s life than the company using the
sum-of-the-year’s-digits method (YD). Thus, SL company’s net income will be lower
during the 4th year.
10. (C) Total depreciation on any asset is limited to the cost of that asset. If an amount of
money equal to depreciation expense is set aside, the total accumulation will allow
for the purchase of a new machine only if prices remain reasonably constant or
decrease. The depreciation method employed has no impact on the total amount of
depreciation.
11. (B) Under decreasing charge depreciation methods, depreciation expense is computed
for each complete year of an asset’s life. If the asset being depreciated under the
decreasing charge method is purchased during a year, the depreciation for the entire
year is computed and then a portion is allocated to depreciation expense based on
the percentage of the year that the asset was used.
12. (C) Composite or group depreciation is defined as a system whereby a straight-line rate
is computed by dividing the total of the annual depreciation expense for all assets in
the group by the total cost of the assets.
13. (B)
Asset cost ...................................................................... $30,000
Depreciation at 1/1/20 .................................................... 15,000
Book value ..................................................................... 15,000
Overhaul addition ........................................................... 5,000
Depreciable base ........................................................... $20,000
Remaining useful life 10 + 5 = 15
Depreciation in 2020: $20,000 ÷ 15 = $1,333
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 27

14. (C)
Asset cost .......................................................................... $25,000
Depreciation 5/1/10 to 3/1/19 ($200/mo.)........................... 21,200
Book value at 3/1/19 .......................................................... $ 3,800
Sales price ......................................................................... 800
Loss on sale ....................................................................... $ 3,000
15. (C) With a uniform rate of depreciation being charged, a steadily increasing ratio of total
accumulated depreciation to total cost would indicate that the estimated average
useful life of the machinery is less than the actual average useful life. If the
estimated average useful life of the machinery was equal to the actual average
useful life, the ratio would remain constant.
16. (B) Whenever the estimated useful life of an asset is changed, the undepreciated book
value of the asset should be depreciated over the new estimated useful life. This
change is merely a change in an estimate and does not require any special
accounting treatment.
17. (D)
SYD Denominator = [12 × (12 + 1)] /2 = 78
Depreciable Base: $165,000 − $9,000 = $156,000
1st Full Year Depreciation: 12/78 × $156,000 = $24,000
2nd Full Year Depreciation: 11/78 × $156,000 = $22,000
2019 Depreciation (April 1 to December 31): $24,000 × 9/12 = $18,000
2020 Depreciation (January 1 to December 31):
$24,000 − $18,000 = $ 6,000
$22,000 × 9/12 = 16,500
2020 Depreciation $22,500
18. (B) A permanent impairment in the value of property, plant, and equipment is recorded
by recognizing a loss and reducing the book value of the asset through a credit to
accumulated depreciation. If the asset is to continue in use, estimates of the
remaining useful life and the salvage value may be revised as well.
19. (D) Under the recoverability test, because the expected future net cash flows
(undiscounted) of $50,000 is less than the carrying value of $52,750 [$100,000 −
(($100,000 − $10,000)/20) × 10.5] an impairment has occurred. The impairment loss
is the amount by which the carrying amount of the asset exceeds its fair value. If no
market exists, the present value of expected future net cash flows is used as the fair
value. Therefore, the impairment loss is equal to $17,750 ($52,750 − $35,000).
20. (A) Once an impairment loss is recorded, the reduced carrying amount of an asset held
for use becomes its new cost basis. As a result, the new cost basis is not changed
except for depreciation in future periods or for additional impairments.
21. (C) Tangible equipment costs are normally not considered in the depletion base;
instead, separate depreciation charges are employed because the asset can be
moved from one drilling or mining site to another. Tangible assets that cannot be
moved should be separately depreciated over their useful life or the life of the
resource, whichever is shorter.
11 - 28 Student Study Guide for Intermediate Accounting, 17th Edition

22. (D)
Land cost ....................................................................... $6,000,000
Restoration ..................................................................... 900,000
Geological surveys ......................................................... 300,000
Total cost ....................................................................... $7,200,000
Land residual value ........................................................ 600,000
Depletion base ............................................................... $6,600,000
Depletion expense per ton $6,600,000 ÷ 3,000,000 = $2.20.
23. (C) Lucky Mine’s depletion rate per ton of mined ore can be calculated as follows:
Depletable cost:
Purchase price of mine $3,400,000
Development cost 800,000
$4,200,000
Less: Estimated value of property after ore has
been extracted 200,000
Total depletable cost $4,000,000
Depletable cost $4,000,000
= = $1 depletion per ton of mined ore
Estimated recoverable ore 4,000,000 tons

Since Lucky Mine Corporation removed 400,000 tons of ore in 2017, it should record
$400,000 (400,000 tons × $1) as its depletion cost. This amount would be charged to the
account Inventory of Mined Ore and credited to Accumulated Depletion.
Answer (A) is incorrect because depletion cost would be recorded as the ore is mined, not
as it is sold.
24. (B) Only a general description of the method or methods used in computing depreciation
with respect to major classes of depreciable assets is required in the financial
statements regarding depreciation. In addition, answers (A), (C), and (D) are
required disclosures in the financial statements.
*25. (A) Depreciation is still an expense which is shown as a reduction in net income under
the MACRS. The data in alternatives B, C, and D represent the basic differences in
the depreciation computation under MACRS.
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 29

REVIEW EXERCISES
1. (a)
Item A: Year Computation Depreciation
Recorded
2013 $108,000 × 8/36 $24,000
2014 108,000 × 7/36 21,000
2015 108,000 × 6/36 18,000
2016 108,000 × 5/36 15,000
2017 108,000 × 4/36 12,000
Total Depreciation $90,000
Repair Expense Charged to
Accumulated Depreciation (1,500 × 5) (7,500)
Depreciation Balance (2017) $82,500
Entry by bookkeeper for sale of item A:
Cash 25,000
Accumulated depreciation 82,500
Loss on sale 5,500
Item A 113,000
Correct entry for sale of item A:
Cash 25,000
Accumulated depreciation 90,000
Gain on sale 2,000
Item A 113,000
(b)
Depreciation
Item B: Year Computation Recorded
2013 $140,000 × .20 $ 28,000
2014 112,000 × .20 22,400
2015 89,600 × .20 17,920
2016 71,680 × .20 14,336
2017 57,344 × .20 11,469
2018 45,875 × .20 9,175
2019 36,700 × .20 7,340
Total Depreciation $110,640
Repair Expense Charged to
Accumulated Depreciation (2,500 × 7) (17,500)
Depreciation Balance (2019) $ 93,140
Entry by bookkeeper for sale of item B:
Cash 40,000
Accumulated depreciation 93,140
Loss on sale 6,860
Item B 140,000
Correct entry for sale of item B:
Cash 40,000
Accumulated Depreciation 110,640
Gain on sale 10,640
Item B 140,000
11 - 30 Student Study Guide for Intermediate Accounting, 17th Edition

2.
Depreciation Method Depreciation Depreciation Book Value
Expense 2020 Expense 2021 December 31, 2021
Straight Line $ 3,750 (a) $ 7,500 (b) $20,750 (c)
Sum-of-the-years’-digits 6,000 (d) 10,500 (e) 15,500 (f)
Declining-balance (200%) 8,000 (g) 12,000 (h) 12,000 (i)

(a) $30,000 × 1/4 × 1/2 = $3,750 (f) $32,000 − (d + e) = $15,500

(b) $30,000 × 1/4 = $7,500 (g) $32,000 × .5 × 1/2 = $8,000
(c) $32,000 − (a + b) = $20,750 (h) $8,000 + (8,000 × 1/2) = $12,000
(d) $30,000 × 4/10 × 1/2 = $6,000 (i) 32,000 − (g + h) = $12,000
(e) $6,000 + (9,000 × 1/2) = $10,500

3.
Depreciation
Original Salvage Depreciable Useful per year
Asset Cost Value Cost Life (straight-line)
A $11,000 $ 500 $10,500 5 $ 2,100
B 7,000 200 6,800 4 1,700
C 12,500 800 11,700 3 3,900
D 16,000 1,000 15,000 6 2,500
$46,500 $2,500 $44,000 $10,200
$10,200
Composite rate = = .219 or 22%
46,500
Composite life (44,000 ÷ 10,200) = 4.31 years
1st year’s depreciation ($46,500 × .22) = $10,230
Sale of asset B for $1,000 after 3 years:
Cash ....................................................................... 1,000
Accumulated depreciation ...................................... 6,000
Asset B ............................................................. 7,000
 Chapter 11: Depreciation, Impairments, and Depletion 11 - 31

4. (a)
Current Book Value: Cost $560,000
Accumulated Depreciation 240,000
Book Value $320,000
After Impairment: Cost $560,000
Accumulated Depreciation 499,000
Book Value $ 61,000
Journal Entry:
Loss on Impairment 259,000
Accumulated Depreciation 259,000
*($320,000 − $61,000)
(b) The loss of $259,000 is reported separately in the Other Expenses and Losses section
of the income statement.
5.
Depletion base:
Land rights .................................................................. $ 80,000
Exploration costs ......................................................... 125,000
Intangible development costs ($980,000 − 250,000) .. 730,000
Depletion base ..................................................... $935,000

Depletion rate per barrel: $935,000 ÷ 2,500,000 = $.374

First year’s depletion: 175,000 × .374 = $65,450

Depletion expense 65,450

Oil Deposit Asset 65,450

Balance sheet presentation:

Oil deposit (at cost) .................................................. $935,000
Less accumulated depletion .................................... 65,450 $869,550
Tangible assets should be reported separately with a deduction for the related
accumulated depreciation.