1 Depreciation, Impairments, and Depletion Instructor Instructor Adnan Shoaib Adnan Shoaib PART II: Corporate Accounting PART II: Corporate Accounting Concepts and Issues Concepts and Issues Lecture 13 Lecture 13
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Depreciation, Impairments, and
Depletion
InstructorInstructorAdnan ShoaibAdnan Shoaib
PART II: Corporate Accounting Concepts and PART II: Corporate Accounting Concepts and IssuesIssues
Lecture 13Lecture 13
2
Review of Lecture 11 (LIFO at Fluctuating Prices and Subsequent Review of Lecture 11 (LIFO at Fluctuating Prices and Subsequent adjustments)adjustments)
3 LO 8 Determine ending inventory by applying the LIFO retail methods.
Fluctuating Prices—Dollar-Value LIFO Retail
If the price level does change, the company must eliminate
the price change so as to measure the real increase in
inventory, not the dollar increase.
LIFO RETAIL METHODS
4 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration: Assume that the beginning inventory had a retail market
value of $10,000 and the ending inventory had a retail market value of
$15,000. Assume further that the price level has risen from 100 to 125.
It is inappropriate to suggest that a real increase in inventory of
$5,000 has occurred. Instead, the company must deflate the ending
inventory at retail.Illustration 9A-4
LIFO RETAIL METHODS
5
Illustration: Assume that the current 2010 price index is 112
(prior year 100) and that the inventory ($56,000) has remained
unchanged.Illustration 9A-5
Dollar-Value LIFO Retail Method—
FluctuatingPrices
LIFO RETAIL METHODS
LO 8
6 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration: From this information, we compute the inventory amount at cost:
Illustration 9A-6
Hernandez must restate layers of a particular year to the prices in effect in the year when the layer was added.
LIFO RETAIL METHODS
7 LO 8
Illustration: Using the data from the previous example, assume that
the retail value of the 2013 ending inventory at current prices is
$64,800, the 2013 price index is 120 percent of base-year, and the
cost-to-retail percentage is 75 percent. Compute the ending inventory
at LIFO cost.Illustration 9A-8
Subsequent Adjustments under Dollar-Value LIFO Retail
LIFO RETAIL METHODS
8
Depreciation, Impairments, and
Depletion
InstructorInstructorAdnan ShoaibAdnan Shoaib
PART II: Corporate Accounting Concepts and PART II: Corporate Accounting Concepts and IssuesIssues
Lecture 13Lecture 13
9
1. Explain the concept of depreciation.
2. Identify the factors involved in the depreciation process.
3. Compare activity, straight-line, and decreasing-charge methods
of depreciation.
4. Explain special depreciation methods.
5. Explain the accounting issues related to asset impairment.
6. Explain the accounting procedures for depletion of natural
resources.
7. Explain how to report and analyze property, plant, equipment,
and natural resources.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
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Depreciation
Factors involved
Methods of
depreciation
Special methods
Special issues
Impairments DepletionPresentation and Analysis
Recognizing
impairments
Measuring
Impairments
Restoration of
loss
Assets to be
disposed of
Presentation
Analysis
Establishing a
base
Write-off of
resource cost
Estimating
reserves
Liquidating
dividends
Continuing
controversy
Depreciation, Impairments, and DepletionDepreciation, Impairments, and DepletionDepreciation, Impairments, and DepletionDepreciation, Impairments, and Depletion
11
Allocating costs of long-term assets:
Fixed assets = Depreciation expense
Intangibles = Amortization expense
Natural resources = Depletion expense
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.
Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 1 Explain the concept of depreciation.
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 2 Identify the factors involved in the depreciation process.
Three basic questions:
Factors Involved in the Depreciation Process
(1) What depreciable base is to be used?
(2) What is the asset’s useful life?
(3) What method of cost allocation is best?
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 2 Identify the factors involved in the depreciation process.
Depreciable Base
Factors Involved in the Depreciation Process
Illustration 11-1
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 2 Identify the factors involved in the depreciation process.
Estimation of Service Lifes
Factors Involved in the Depreciation Process
Service life often differs from physical life.
Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of
physical life).
2. Economic factors (inadequacy, supersession,
and obsolescence).
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.
The profession requires the method employed be “systematic
and rational.” Examples include:
Methods of Depreciation
(1) Activity method (units of use or production).
(2) Straight-line method.
(3) Sum-of-the-years’-digits.
(4) Declining-balance method.
(5) Group and composite methods.
(6) Hybrid or combination methods.
Accelerated methods
Special methods
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 3
Activity MethodIllustration 11-2
Illustration: If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is:
Stanley Coal Mines Facts
Illustration 11-3
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Straight-Line Method
Illustration: Stanley computes depreciation as follows:
Stanley Coal Mines Facts
Illustration 11-4
Illustration 11-2
LO 3
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Decreasing-Charge Methods
Stanley Coal Mines Facts
Sum-of-the-Years’-Digits. Each fraction uses the sum of the
years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator
is the number of years of estimated life remaining as of the
beginning of the year.
Illustration 11-2
n(n+1)
2==
5(5+1)
2== 15Alternate sum-of-the-
years’ calculationLO 3
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.
Sum-of-the-Years’-DigitsIllustration 11-6
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Decreasing-Charge Methods
Stanley Coal Mines Facts
Declining-Balance Method.
Utilizes a depreciation rate (percentage) that is some multiple
of the straight-line method.
Does not deduct the salvage value in computing the
depreciation base.
Illustration 11-2
LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Declining-Balance MethodIllustration 11-7
LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Maserati Corporation purchased a new machine for its assembly
process on August 1, 2012. The cost of this machine was $150,000.
The company estimated that the machine would have a salvage value
of $24,000 at the end of its service life. Its life is estimated at 5 years
and its working hours are estimated at 21,000 hours. Year-end is
December 31.
Instructions: Compute the depreciation expense under the following
methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.
LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.
23
Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2012 126,000$ / 5 = 25,200$ x 5/12 = 10,500$ 10,500$
2013 126,000 / 5 = 25,200 25,200 35,700
2014 126,000 / 5 = 25,200 25,200 60,900
2015 126,000 / 5 = 25,200 25,200 86,100
2016 126,000 / 5 = 25,200 25,200 111,300
2017 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
126,000$
Journal entry:
2012 Depreciation expense 10,500
Accumultated depreciation 10,500
Straight-line Method
LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.
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($126,000 / 21,000 hours = $6 per hour)(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2012 800 x $6 = 4,800$ 4,800$ 4,800$
2013 x =
2014 x =
2015 x =
2016 x =
800 4,800$
Journal entry:
2012 Depreciation expense 4,800
Accumultated depreciation 4,800
Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 3
Activity Method (Assume 800 hours used in 2012)
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Sum-of-the-Years’-Digits MethodCurrent
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2012 126,000$ x 5/15 = 42,000 x 5/12 17,500$ 17,500$
2013 126,000 x 4.58/15 = 38,500 38,500 56,000
2014 126,000 x 3.58/15 = 30,100 30,100 86,100
2015 126,000 x 2.58/15 = 21,700 21,700 107,800
2016 126,000 x 1.58/15 = 13,300 13,300 121,100
2017 126,000 x .58/15 = 4,900 4,900 126,000
126,000$
Journal entry:
2012 Depreciation expense 17,500
Accumultated depreciation 17,500
LO 3
5/12 = .4166677/12 = .583333
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Double-Declining Balance MethodCurrent
Depreciable Rate Annual Partial Year
Year Base per Year Expense Year Expense
2012 150,000$ x 40% = 60,000$ x 5/12 = 25,000$
2013 125,000 x 40% = 50,000 50,000
2014 75,000 x 40% = 30,000 30,000
2015 45,000 x 40% = 18,000 18,000
2016 27,000 x 40% = 10,800 Plug 3,000
126,000$
Journal entry:
2012 Depreciation expense 25,000
Accumultated depreciation 25,000
LO 3
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 4 Explain special depreciation methods.
Choice of method depends on nature of the assets involved:
Special Depreciation Methods
Group method used when the assets are similar in nature
and have approximately the same useful lives.
Composite approach used when the assets are dissimilar
and have different lives.
Companies are also free to develop tailor-made depreciation methods,
provided the method results in the allocation of an asset’s cost in a
systematic and rational manner (Hybrid or Combination Methods).
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Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
LO 4 Explain special depreciation methods.
(1) How should companies compute depreciation for
partial periods?
(2) Does depreciation provide for the replacement of
assets?
(3) How should companies handle revisions in
depreciation rates?
Special Depreciation Issues
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Accounted for in the period of change and future
periods (Change in Estimate).
Not handled retrospectively.
Not considered errors or extraordinary items.
LO 4 Explain special depreciation methods.
Depreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost AllocationDepreciation - Method of Cost Allocation
Change in Depreciation Rate
30
Arcadia HS, purchased equipment for $510,000 which was
estimated to have a useful life of 10 years with a residual value
of $10,000 at the end of that time. Depreciation has been
recorded for 7 years on a straight-line basis. In 2012 (year 8), it
is determined that the total estimated life should be 15 years
with a residual value of $5,000 at the end of that time.
Questions:
What is the journal entry to correct
the prior years’ depreciation?
Calculate the depreciation expense
for 2012.
No Entry No Entry RequiredRequired
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
LO 4 Explain special depreciation methods.
31
Equipment $510,000Accumulated depreciation 350,000
Net book value (NBV) $160,000
Balance Sheet (Dec. 31, 2011)
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example After 7 years
Equipment cost $510,000
Salvage value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
First, establish NBV First, establish NBV at date of change in at date of change in
estimate.estimate.
First, establish NBV First, establish NBV at date of change in at date of change in
estimate.estimate.
LO 4 Explain special depreciation methods.
32
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example After 7 years
Net book value $160,000
Salvage value (new) 5,000
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation $ 19,375
Depreciation Expense calculation
for 2012.
Depreciation Expense calculation
for 2012.
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2012
LO 4 Explain special depreciation methods.
33
ImpairmentsImpairmentsImpairmentsImpairments
LO 5 Explain the accounting issues related to asset impairment.
When the carrying amount of an asset is not recoverable, a
company records a write-off referred to as an impairment.
Events leading to an impairment:
a. Significant decrease in the fair value of an asset.
b. Significant change in the manner in which an asset is used.
c. Adverse change in legal factors or in the business climate.
d. An accumulation of costs in excess of the amount originally
expected to acquire or construct an asset.
e. A projection or forecast that demonstrates continuing losses
associated with an asset.
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ImpairmentsImpairmentsImpairmentsImpairments
1. Review events for possible impairment.
2. If the review indicates impairment, apply the recoverability test. If
the sum of the expected future net cash flows from the long-lived
asset is less than the carrying amount of the asset, an
impairment has occurred.
3. Assuming an impairment, the impairment loss is the amount by
which the carrying amount of the asset exceeds the fair value of
the asset. The fair value is the market value or the present value
of expected future net cash flows.
Measuring Impairments
LO 5 Explain the accounting issues related to asset impairment.
35 LO 5
Illustration 11-16Graphic of Accounting for Impairments
ImpairmentsImpairmentsImpairmentsImpairments
36
Presented below is information related to equipment owned by Pujols Company at December 31, 2012. Assume that Pujols will continue to use this asset in the future. As of December 31, 2012, the equipment has a remaining useful life of 4 years.
Instructions:
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012.
(b) Prepare the journal entry to record depreciation expense for 2013.
(c) The fair value of the equipment at December 31, 2013, is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
Cost 9,000,000$
Accumulated depreciation to date 1,000,000
Expected future net cash flows 7,000,000
Fair value 4,400,000
ImpairmentsImpairmentsImpairmentsImpairments
LO 5
37
Loss on impairment 3,600,000
Accumulated depreciation 3,600,000
ImpairmentsImpairmentsImpairmentsImpairments
Cost $ 9,000,000
Accumulated depreciation 1,000,000
Carrying amount 8,000,000
Fair value 4,400,000
Loss on impairment $ 3,600,000
(a).
12/31/12
LO 5 Explain the accounting issues related to asset impairment.
38
ImpairmentsImpairmentsImpairmentsImpairments
Net carrying amount $ 4,400,000
Useful life 4 years
Depreciation per year $ 1,100,000
(b).
LO 5 Explain the accounting issues related to asset impairment.
Depreciation expense 1,100,000
Accumulated depreciation 1,100,000
(c). Restoration of any impairment loss is not permitted.
12/31/11
39
Natural resources, often called wasting assets, include
petroleum, minerals, and timber.
They have two main features:
1. complete removal (consumption) of the asset, and
2. replacement of the asset only by an act of nature.
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
Depletion is the process of allocating the cost of natural resources.
40
Establishing a Depletion Base
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
Computation of the depletion base involves four factors:
(1) Acquisition cost.
(2) Exploration costs.
(3) Development costs.
(4) Restoration costs.
41
Write-off of Resource Cost
Normally, companies compute depletion on a units-of-
production method (activity approach). Depletion is a function
of the number of units extracted during the period.
Calculation:
Total cost – Residual value
Total estimated units available= Depletion cost per unit
Units extracted x Cost per unit = Depletion
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
42
Illustration: MaClede Co. acquired the right to use 1,000
acres of land in Alaska to mine for silver. The lease cost is
$50,000, and the related exploration costs on the property are
$100,000. Intangible development costs incurred in opening
the mine are $850,000. MaClede estimates that the mine will
provide approximately 100,000 ounces of silver. Illustration 11-17
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
43
If MaClede extracts 25,000 ounces in the first year, then the
depletion for the year is $250,000 (25,000 ounces x $10).
LO 6
Inventory 250,000
Accumulated Depletion 250,000
MaClede’s statement of financial position:
Depletion cost related to inventory sold is part of cost of goods sold.
DepletionDepletionDepletionDepletion
Illustration 11-18
44
Estimating Recoverable Reserves
Same as accounting for changes in estimates.
Revise the depletion rate on a prospective basis.
Divides the remaining cost by the new estimate of the
recoverable reserves.
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
45
Liquidating Dividends - Dividends greater than the amount of accumulated net income.
Illustration: Callahan Mining had a retained earnings balance
of $1,650,000, accumulated depletion on mineral properties of
$2,100,000, and share premium of $5,435,493. Callahan’s board
declared a dividend of $3 a share on the 1,000,000 shares
outstanding. It records the $3,000,000 cash dividend as follows.
Retained Earnings 1,650,000
Paid-in Capital in Excess of Par 1,350,000
Cash
3,000,000
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
46
Oil and Gas Industry:
Full cost concept
Successful efforts concept
DepletionDepletionDepletionDepletion
LO 6 Explain the accounting procedures for depletion of natural resources.
Continuing Controversy
47
Presentation of Property, Plant, Equipment, and Natural Resources
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
Basis of valuation (cost)
Pledges, liens, and other commitments
Depreciation expense for the period.
Balances of major classes of depreciable assets.
Accumulated depreciation.
A description of the depreciation methods used.
Depreciating assets, use Accumulated Depreciation.
Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.
Disclosures
LO 7 Explain how to report and analyze property, plant, equipment, and natural resources.
48
Measure of a firm’s ability to generate
sales from a particular investment
in assets.
Illustration 11-20
LO 7
Analysis of Property, Plant, and Equipment
Asset Turnover Ratio
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
49
Measure of the ability to generate operating
income from a particular level of
sales.
Illustration 11-21
LO 7
Profit Margin on Sales
Analysis of Property, Plant, and Equipment
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
50
Measures a firm’s success in using
assets to generate earnings.
LO 7
Rate of Return on Assets
Analysis of Property, Plant, and Equipment
Illustration 11-22
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
51
Analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:
Net Income
Average Total Assets
Rate of Return on Assets
=
Net Income
Net Sales
Profit Margin on Sales
=
Net Sales
Asset Turnover x
x
Average Total Assets
LO 7 Explain how to report and analyze property, plant, equipment, and natural resources.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
52
$53.5
($838.2 + $813.5) / 2
Rate of Return on Assets
=
$53.5
$495.5
Profit Margin on Sales
=
$495.5
Asset Turnover x
x
6.5% 10.5% =
x .60
($838.2 + $813.5) / 2
Analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:
LO 7 Explain how to report and analyze property, plant, equipment, and natural resources.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
53 LO 8 Describe income tax methods of depreciation.
Modified Accelerated Cost Recovery System
MACRS differs from GAAP in three respects:
1. a mandated tax life, which is generally shorter than the
economic life;
2. cost recovery on an accelerated basis; and
3. an assigned salvage value of zero.
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
54 LO 8 Describe income tax methods of depreciation.
Modified Accelerated Cost Recovery System
Tax Lives (Recovery Periods)Illustration 11A-1
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
55 LO 8 Describe income tax methods of depreciation.
Modified Accelerated Cost Recovery System
Tax Depreciation Methods
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
Illustration 11A-2
56 LO 8 Describe income tax methods of depreciation.
Modified Accelerated Cost Recovery System
Illustration: Computer and peripheral equipment purchased by Denise Rode Company on January 1, 2011.
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
57 LO 8 Describe income tax methods of depreciation.
Modified Accelerated Cost Recovery System
Illustration 11A-3
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
Illustration:
58 LO 8
Modified Accelerated Cost Recovery System
Illustration: Using the rates from the MACRS depreciation rate schedule for a 5-year class of property, Rode computes depreciation as follows
Illustration 11A-4
Illustration 11A-5
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
59 LO 8 Describe income tax methods of depreciation.
Modified Accelerated Cost Recovery System
Additional Issues
Optional straight-line method.
Tax versus book depreciation.
INCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATIONINCOME TAX DEPRECIATION
60
RELEVANT FACTS
The definition of property, plant, and equipment is essentially the same under GAAP and IFRS.
Under both 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. GAAP recently conformed to IFRS in this area.
The accounting for plant asset disposals is the same under GAAP and IFRS.
The accounting for the initial costs to acquire natural resources is similar under GAAP and IFRS.
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RELEVANT FACTS
Under both GAAP and IFRS, interest costs incurred during construction must be capitalized. Recently, IFRS converged to GAAP.
GAAP also views depreciation as allocation of cost over an asset’s life. GAAP permits the same depreciation methods (straight-line, diminishing-balance, units-of-production) as IFRS.
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End of Lecture 13End of Lecture 13End of Lecture 13End of Lecture 13