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1、 CHAPTER 10 DEPRECIATION AND DEPLETION CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Number Content Time Range (minutes) E10-1 Depreciation Methods. Straight-line, hours worked, units of output. 5-10 E10-2 Depreciation Methods. Straight-line, sum-of-the

2、-years'-digits, double-declining balance. Return on assets. 5-10 E10-3 Acquisition Cost and Depreciation. Computation of acquisition cost and annual depreciation under units of production and sum-of-the-years'-digits methods. 10-15 E10-4 Depreciation Methods. Recognition of me

3、thod used given the expense. Computation of expense. 5-10 E10-5 Rate of Return. Determination under straight-line and double-declining balance methods. 5-10 E10-6 Acquisition Cost. Computation under straight-line, sum-of-the-years'-digits, and double-declining-balance method

4、s. 5-10 E10-7 Group Depreciation. Straight-line. Journal entries to record transactions. 5-15 E10-8 Composite Depreciation. Straight-line. Journal entries to record transactions. 5-15 E10-9 Retirement/Replacement Methods. Journal entries to record transactions.

5、 5-10 E10-10 (AICPA adapted). Depreciation. Determination of amount to be capitalized and expensed. 10-15 E10-11 Partial Periods. Straight-line to nearest day, to nearest month, to nearest whole year, to one-half year. 10-15 E10-12 Asset Impairment. Determine if asset

6、 impaired. Compute impairment loss. Journal entry. 15-20 E10-13 Depreciation. Financial statements, income taxes, straight-line, double-declining balance, ACRS. 15-20 10-93 Number Content Time Range (minutes) E10-14 Changes and Corrections. Straight-line to s

7、um-of-the-years'-digits. Increased asset life. Residual value ignored. Journal entries. 15-20 E10-15 (AICPA adapted). Change in Depreciation Method. Compute book value under straight-line depreciation and effect of switch to sum-of-years'-digits method. 15-20 E10-16 Depletion.

8、 Determination of depletion cost per unit, inventory cost, and cost of goods sold. 10-15 E10-17 (AICPA adapted). Depletion. Expense determination. 5-10 P10-1 Depreciation Methods. Straight-line, hours worked, units of output, sum-of-the-years'-digits, double-declining-balance

9、, 150% declining-balance. Return on assets. 20-25 P10-2 Depreciation Methods. Straight-line, hours worked, units of output. 15-20 P10-3 Depreciation Methods. Straight-line, sum-of-the-years'-digits, double-declining-balance, 150% declining-balance. Return on assets. 20-25

10、 P10-4 Declining Balance. Fixed percentage. Computation of depreciation rate and yearly deduction. 10-15 P10-5 Changing Depreciation. Double-declining-balance to straight-line at varying points in asset's life. 20-30 P10-6 Cost of Asset. 150% declining-balance. Determinatio

11、n of acquisition cost and depreciation expense. 10-20 P10-7 Partial Periods. Depreciation computed to one-half year. Journal entries to record depreciation and sale. 20-30 P10-8 Group and Composite Depreciation. Straight-line. Journal entries to record various transactions (dep

12、reciation, retirement). 30-40 P10-9 Composite Depreciation. Straight-line. Journal entries to record various transactions (depreciation, acquisition, retirement). 15-20 P10-10 Asset Impairment. Determine if asset impaired. Compute impairment loss. Journal entry. Effects of

13、changed assumptions. 20-30 P10-11 Depreciation and Income Taxes. Straight-line and ACRS. Prepare income statements for financial reporting and income tax purposes. 20-30 Number Content Time Range (minutes) P10-12 Depletion. FIFO. Calculation of depletion amoun

14、t in ending inventory and the income statement. Balance sheet preparation. 20-30 P10-13 Depletion. FIFO. Calculation of expense and cost of inventory. Recalculation of per unit amount and expense. 20-30 P10-14 Changes and Corrections. Double-declining-balance to straight-line.

15、 Change in service life. Residual value included in depreciation computation. Journal entries. 20-30 P10-15 (AICPA adapted). Adjusting Entries. Straight-line depreciation to one-half year. Construction, donation, parking lot. Journal entries. 40-60 P10-16 Comprehensive: Var

16、ious Issues. Journal entries to record various transactions. Determination of account balances. Includes topics from Chapter 8. 40-60 P10-17 (AICPA adapted). Comprehensive: Capitalized Costs and Depreciation. Prepare schedules to determine land and building costs, and depreciation exp

17、ense. 30-40 P10-18 (AICPA adapted). Comprehensive: Depreciation. Completion of the fixed asset and depreciation schedule. Acquisition, exchange, construction, donation, sale. 40-60 P10-19 Errors. Calculate increase or decrease in prior four years earnings resulting from errors.

18、 Group depreciation. Sale, exchange, acquisition, retirement. Journal entry to correct the books. 40-60 P10-20 (AICPA adapted). Comprehensive: Depreciation and PPE. Schedules for depreciation and amortization expense, accumulated depreciation and amortization, and gain or loss from di

19、sposal. Balance sheet disclosure. 40-60 P10-21 (AICPA adapted). Comprehensive: Acquisitions, Disposals, Depreciation. Schedules for changes in plant assets, depreciation expense, and gain or loss on asset disposal. 40-60 P10-22 Comprehensive: Financial Statements. Preparatio

20、n of income statement, statement of retained earnings, and balance sheet based on journal entries for various transactions (including material from previous chapters). 40-60 ANSWERS TO QUESTIONS Q10-1 All three terms--depreciation, depletion, and amortization--refer to the process of al

21、locating the cost of an asset to the periods in which the benefits are recognized as revenues. It is the nature of the asset that distinguishes the three terms. Depreciation is used in reference to tangible assets; depletion refers to natural resources such as oil or gas; and amortization is the a

22、llocation of the cost of intangible assets such as goodwill or leased property. Amortization is sometimes used as the general term to describe the periodic allocation of costs. Q10-2 The four factors used in a company’s computation of the periodic depreciation amount are: 1. Asset cost - all

23、the costs necessary to acquire, install, and prepare the asset for use. 2. Service life - the time of useful service or units of production expected from an asset. 3. Residual (salvage) value - the net amount expected to be obtained from the disposition of the asset at the end of its service l

24、ife. 4. Method of cost allocation - the "systematic and rational" means to assign the cost of the asset to the periods benefitted. Q10-3 The depreciation base is the cost of an asset less the estimated residual value. This is the amount that is allocated over the estimated service life of the

25、 asset. Q10-4 The objective of accounting for depreciation is to match the cost of an asset with the revenues, or benefits, derived from the asset in a systematic and rational manner. Since the cost of an asset less any expected residual value is the total lifetime expense, it is recognized syst

26、ematically against the revenues, or benefits, received. Q10-5 Note: Part c involves an understanding of cash flow concepts discussed briefly in Chapter 4. The recording of depreciation affects a company’s financial statements as follows: a. Income statement - the company expenses depreciatio

27、n directly or through cost of goods sold (for manufacturing assets). In either case, it decreases income before income taxes, income tax expense, and net income. b. Balance sheet - the Accumulated Depreciation account offsets the related asset account. Thus, recording depreciation reduces the b

28、ook value of a company's assets. Depreciation included in manufacturing costs on unsold inventory affects the cost of the inventory on the balance sheet. Since net income is reduced, retained earnings are also reduced. c. Statement of cash flows - depreciation is an expense that does not requir

29、e an outlay of cash. Consequently, it is added back to net income to show net cash provided by operating activities under the indirect method. Under the direct method, it is omitted from the statement. Q10-6 Depreciation is not a means of generating funds for the replacement of an asset. It is o

30、nly a method of allocating the cost of an asset over its life. The availability of funds for replacement is a separate consideration. Q10-7 By definition, a cost is considered variable if it changes in proportion to changes in production. Thus, when depreciation is based on activity levels, suc

31、h as hours worked or output produced, it is a variable cost. In contrast, depreciation based on time is a fixed cost. Q10-8 Depreciation results primarily from physical causes and functional causes. Wear and tear, which is due to operational usage, suggests the use of an activity method of depr

32、eciation. Deterioration and decay are more dependent upon time and thus a time method of depreciation, such as the straight-line, declining-balance, or sum-of-the-years'-digits method, is more appropriate. The functional causes of depreciation--obsolescence or inadequacy--seem to relate more to ti

33、me methods of depreciation. However, each situation must be evaluated separately because there are no steadfast rules for a depreciation method--only that it be "systematic and rational." The requirement that all companies use the same method of depreciation is not desirable because different pa

34、tterns of benefits do exist for different types of assets. If the purpose of such a requirement is to reduce the differences in financial statements, this would not accomplish it. Even if two companies are using the same method of depreciation, by assuming different useful lives or salvage values,

35、 the depreciation amount can be markedly different. Such a requirement would be an example of form over economic substance. Q10-9 Accelerated methods of depreciation are the most appropriate when it can be assumed that the benefits derived from the asset will be declining each year during its se

36、rvice life. Q10-10 The group and composite methods of depreciation are similar in that they are both applied to a combination of assets. The group method is used when the assets are similar in nature and are expected to have similar service lives and residual values. The composite method is for

37、 assets that are heterogeneous; they have similar purposes or characteristics but do not necessarily have similar service lives or residual values. Under both methods gains or losses on disposal are not recognized until all the assets are retired. Q10-11 Both the retirement and replacement metho

38、ds of expense recognition record the expense when an asset is retired. The retirement method expenses the cost of the old asset, less any residual value, at the time of retirement. Under the replacement method, it is the cost of the new asset, again less any residual value, that is expensed. Q1

39、0-12 A manufacturing company debits depreciation on manufacturing assets to a Goods in Process account (an inventory account). In this way, it recognizes the expense of depreciation when it sells the inventory rather than when it records the depreciation. Thus, if a company manufactures more goods

40、 than it sells and these goods remain in inventory, the depreciation included in the income statement is less than the asset's depreciation amount. Q10-13 The depreciation on an asset is not intended to produce a book value equal to the market value. It is a method of cost allocation. Therefo

41、re, even though the cost of replacement goes up, a company records depreciation as long as the estimated residual value is less than the book value. Q10-14 Depreciation of an asset is not an attempt to measure the value of an asset. Thus, a company should use an accelerated method of depreciatio

42、n if the benefits of the asset are greater in the early years and decline in later years, not because of the loss in value during the early years. Q10-15 The manager seems to be using the term "depreciate" in another sense. With regular repairs and maintenance, perhaps the transmission lines hav

43、e extended useful lives and do not lose their value. In the accounting sense, depreciation is the allocation of the cost of an asset. Unless the lines have an unlimited useful life, or an estimated residual value greater than their cost, the cost should be allocated over the service life. Depreci

44、ation is not a means of valuing an asset and does not represent a decline in the value of an asset. Q10-16 The required disclosures for depreciation as set forth in APB Opinion No. 12 are as follows: 1. Depreciation expense for the period 2. Balances of depreciable assets, classified by nat

45、ure or function, at balance sheet date 3. Accumulated depreciation, by major classification or total, at balance sheet date 4. A description of the method(s) used in computing depreciation with respect to the major classes of depreciable assets Q10-17 Because the underlying purposes behind

46、depreciation are different for financial reporting and for income tax reporting, the method for each is different. Accounting principles require the depreciation method to be "systematic and rational" and that it match the depreciation amounts to the benefits received from the assets. For income t

47、ax purposes, a company uses the Accelerated Cost Recovery System (ACRS) for assets purchased from 1981 through 1986, and uses the Modified ACRS for assets purchased in 1987 and later years. (For assets purchased before 1981, it uses accelerated depreciation methods). The MACRS allows the expensing

48、 of more of the cost early in the life of the asset and thus increases the net benefits to the company (on a present value basis). The acceleration of the expensing under MACRS results from the use of a shorter life, the accelerated methods (for assets with lives of 3, 5, 7, 10, 15, and 20 years),

49、and the use of a zero residual value. Q10-18 A company’s depletion for income tax purposes and financial reporting are the same if it uses the cost method for both. However, for income tax purposes it may use the percentage-depletion method, which departs from the concept of cost allocation. Un

50、der this tax method, the company may deduct a stated percentage of gross income as depletion expense over the life of the asset. In addition, the total depletion expense during the asset's life may exceed the cost of that asset. ANSWERS TO CASES C10-1 (AICPA adapted solution) 1. a. The

51、unit method of recording depreciation involves the treatment of fixed assets or substantial additions thereto as individual items. The method entails maintaining detailed records of the costs of specific assets and related allowances for depreciation. Computation of depreciation is based on the es

52、timated useful life of the individual asset. The method is distinguished from group and composite-life methods under which the cost and estimated life of the assets are commingled. Depreciation may be recorded by straight-line, accelerated, or other accepted computation methods. b. Under the gr

53、oup or composite-life methods, assets are aggregated into accounting units. Such grouping might be horizontal, vertical, or geographical. Horizontal grouping assembles together all assets of similar physical characteristics, such as trucks, presses, or returnable containers. A vertical or functio

54、nal grouping comprises all assets contributing to a common economic function, such as a sugar refinery or service station. The geographical grouping includes all assets in a district or region, such as telegraph poles. Depreciation under these methods requires development of a weighted average r

55、ate from the assets' depreciable cost and estimated life. Separate accounts are established for the total cost of each asset grouping and its related allowance for depreciation. The asset grouping should be composed of a large number of units to obtain a reliable average life. 2. Arguments for

56、the use of the unit method of computing depreciation include: (1) The method is simple in that it does not require involved mathematical computations. (2) The gain or loss on the retirement of a particular asset can be computed. (3) For cost purposes, depreciation on idle equipment can be i

57、solated. (4) The method results in a more accurately computed depreciation provision in any given year, as the total depreciation amount represents the best estimate of the depreciation of each asset and is not the result of averaging the cost over a longer period of time. Arguments against th

58、e unit method are as follows: (1) Considerable additional bookkeeping is necessary to account for each asset and its related depreciation. (The advent of computer accounting methods reduces the work burden, however.) (2) There is a point of diminishing returns in the accumulation of accountin

59、g data under this method; that is, additional accuracy may not justify the additional cost of record keeping. C10-1 (continued) 2. (continued) (3) Under a decentralized financial control system where a measure of the division's efficiency is the rate of return on the gross book value of

60、 the investment, a division manager might scrap fully or nearly fully depreciated equipment to improve a division's rate of return even though the equipment is still serviceable. (4) There may be reluctance on the part of a division manager to replace equipment not fully depreciated with more eff

61、icient equipment because of the effect of the loss on the division's profits in the year of replacement. Among arguments for the use of the group and composite-life methods are the following: (1) The methods require less detailed bookkeeping. (2) The application of depreciation to the whole

62、 group tends to average out or offset errors, economic or operating, caused by underdepreciation or overdepreciation. (3) Periodic income is not distorted by gains or losses on disposal of assets. (4) A more useful deduction from income is derived from these methods because of their recognitio

63、n that depreciation estimates are based on averages and that gains and losses on individual assets are of little significance. Arguments against the use of the group and composite-life methods would include: (1) The methods would conceal faulty estimates for a long period of time. (2) When

64、there is an early heavy retirement of assets a debit balance might appear in the Allowance for Depreciation account and present an accounting problem. (3) Information is not available regarding a particular machine for cost-calculation purposes. (4) Under a decentralized financial control syst

65、em where a measure of the division's efficiency is the rate of return on the gross book value of the investment, to improve a division's financial reports a division manager might scrap idle but serviceable equipment or equipment that is not earning a satisfactory return on book value. The company

66、would sustain an actual loss in the amount of the value of the equipment scrapped. (5) Under the same situation as in argument 4, except that net book value is used, where the assets, although serviceable, are fully or almost fully depreciated, the division manager might hesitate to replace them because of the high rate of return on investment. 3. Under the unit method, retirements are recorded by removing from the accounts the cost of the asset and its related accumulated depreciation. T