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Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

6. Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment. Learning objective. LO1 Calculate the depreciation of a fixed assets. LO2 Calculate the depletion of a natural resource. LO3 Calculate the amortization of an intangible asset.

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Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

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  1. 6 Property, Plant, and Equipmentand Intangible Assets: Utilizationand Impairment

  2. Learning objective LO1 Calculate the depreciation of a fixed assets. LO2 Calculate the depletion of a natural resource. LO3 Calculate the amortization of an intangible asset. LO4 when a change is made in the service life or residual value. LO5 when a change in depreciation, amortization, or depletion method is made. LO6 involve a significant impairment of assets.

  3. Depreciation • Time-based Methods • Straight-line (SL) 直线法 • Accelerated Methods 加速折旧法 • Sum-of-the-years’ digits (SYD) 年数总和法 • Declining Balance (DB) 余额递减法 Activity-based methods Units-of-production method (UOP). 工作量法

  4. Straight-Line The most widely used and most easily understood method. Results in the same amount of depreciation in each year of the asset’s service life. On January 1, we purchase equipment for $50,000 cash. The equipment has an estimated service life of 5 years and estimated residual value of $5,000. What is the annual straight-line depreciation?

  5. Straight-Line Depreciation Life in Years Residual Value BV = Residual Value at the end of the asset’s useful life.

  6. Accelerated Methods Accelerated methods result inmoredepreciation in the early years of an asset’s useful life andless depreciation in later years of an asset’s useful life. Note that total depreciation over the asset’s usefullife is the same as the straight-line method. Sum-of-the-years’-digits (SYD) depreciation

  7. 2 Sum-of-the-Years’ Digits (SYD) On January 1, we purchase equipment for $50,000 cash. The equipment has a service life of 5 years and an estimated residual value of $5,000. Using SYD depreciation, compute depreciation for the first two years.

  8. Sum-of-the-Years’ Digits (SYD)

  9. Sum-of-the-Years’ Digits (SYD) Residual Value Depreciation Life in Years

  10. DB depreciation Based on the straight-line rate multiplied by an acceleration factor. Computations initially ignore residual value. Declining-Balance (DB) Methods Stop depreciating when: BV = Residual Value Double-Declining-Balance (DDB) depreciationis computed as follows: Note that the Book Value will get lower each year.

  11. Double-Declining-Balance (DDB) Methods On January 1, we purchase equipment for $50,000 cash. The equipment has a service life of 5 years and an estimated residual value of $5,000.What is depreciation for the first two years usingdouble-declining-balance?

  12. Double-Declining-Balance (DDB) Methods

  13. Double-Declining-Balance (DDB) Methods

  14. Units-of-Production

  15. Units-of-Production On January 1, we purchased equipment for $50,000 cash. The equipment is expected to produce 100,000 units during its life and has an estimated residual value of $5,000.If 22,000 units were produced this year, what is the amount of depreciation?

  16. Depletion of Natural Resources As natural resources are “used up,” or depleted, the cost of the natural resources must be allocated to the units extracted. The approach is based on the units-of-production method.

  17. Depletion of Natural Resources ABC Mining acquired a tract of land containing ore deposits. Original costs was $1,100,000. ABC estimated the land contained 40,000 tons of ore, and that the land will be sold for $100,000 after the coal is mined. What is ABC’s depletion rate? Depletion rate = 1,000,000 ÷ 40,000 Tons = $25 Per Ton For the year ABC mined 13,000 tons. What is the total amount of depletion for the year? Depletion = 13,000 tons × $25per ton = $325,000

  18. Amortization of Intangible Assets The amortization process uses the straight-line method, but usually assumes residual value = 0. The amortization entry is: Amortization expense .................................. $$$ Intangible asset ………………........ $$$ To record amortization expense. 我国, 贷方记:累计摊销

  19. Amortization of Intangible Assets Torch, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees. The device has a useful life of 5 years. For year 1, what is Torch’s amortization expense? Amortization expense ................................... 600 Patent ………………........................ 600 To record amortization of patent.

  20. Summary Terms for allocation of costs over time: Depreciation - allocation of the cost of tangible assets to the periods in which the assets are used Depletion - allocation of the cost of natural resources to the periods in which the resources are used Amortization - allocation of the cost of intangible assets to the periods that benefit from these assets

  21. Dr. depreciation expenses Cr. Accumulated depreciation 累计折旧 Dr. depletion expenses Cr. Accumulated depletion 累计折耗 Dr. Amortization expenses Cr. Accumulated amortization 累计摊销

  22. Not amortized. Subject to assessment for impairment ofvalue and may bewritten down. Intangible Assets notSubject to Amortization 第十九条　使用寿命不确定的无形资产不应摊销。 Goodwill

  23. Changes in Estimates On January 1, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. At the beginning of the fourth year, it was decided that there were only 5 years remaining, instead of 7 years. Calculate depreciation expense for the fourthyear using the straight-line method.

  24. Changes in Estimates What happens if we change depreciation methods?

  25. Change in Depreciation Method On January 1, 2009, Matrix, Inc., purchased equipment for $400,000. Matrix expected a residual value $40,000, and a service life of 5 years. Matrix uses the double-declining-balance method to depreciate this type of asset. During 2011, the company switched from double-declining balance to straight-line depreciation. The residual value remained at $40,000. Let’s determine the amount of depreciation to be recorded at the end of 2011.

  26. Change in Depreciation Method December 31, 2011: Depreciation expense ................................... 34,667 Accumulated depreciation................ 34,667 To record depreciation expense.

  27. An asset is impaired when . . . Impairment of Assets 资产减值 第二条　资产减值，是指资产的可收回金额低于其账面价值。 可收回金额应当根据资产的公允价值减去处置费用后的净额 与资产预计未来现金流量的现值 两者之间 较高者 确定。 < recoverable value Its book value Impairmentloss Bookvalue recoverable value – = Reported as partof income from continuing operations. The higher of Fair value less cost to sell, and PV of future net cash inflows.

  28. Impairment of Assets PV of futurecash flows Fair Value less cost to sell $0 $125 $250 Case 3:$275 book value. Loss = $275 - $250 Case 1: $50 book value. No loss recognized Case 2: $150 book value. No loss recognized

  29. Impairment of Assets Because Acme Auto Parts has seen its sales steadily decrease due to the decline in new car sales, Acme’s management believes that equipment that originally cost $350 million, with a $200 million book value may not be recoverable. Manager estimates that PV of future cash flows will be only $100 million, and that the fair value of equipment is $120 million. Has Acme suffered an impairment loss and if so, how should it be recorded? Step 1$120 million < $200 millionImpairment loss is indicated.

  30. Impairment of Assets Step 2Impairment loss = $200 million – $120 million = $80 million

  31. Dec. 31, 2007, Matrix company purchased a new machine: Purchase price 60,500 Freight charges 3,000 Insurance 5,000 Installation 2,000 Matrix Company signed a noninterest-bearing note requiring 60,500 to be paid on Dec. 31, 2009, and the rest was paid in cash. interest rate of 10%. Determine the initial valuation of the machine, and prepare the entry. (P/F , 10%, 2 )=0.82645

  32. the machine’s useful life is five years, residual value would be 3,000. double declining balance method was used. Calculate depreciation for 2008. Jan. 1, 2010, investigate possible impairment. The machine’s fair value is 20, 000, and the residual value became 2,000. recognize impairment loss. What is the amount of the depreciation of the machine in 2010 after recognizing the impairment loss? Change the method, using sum of the years’ digit method.

  33. Equipment 60,000 Discount on note payable 10,500 Note payable 60,500 Cash 10,000 60,000*40%=24,000 Depreciation expense 24,000 Accumulated depreciation 24,000 36,000*40%=14,400 Book value 60,000-24,000-14,400=21,600 Estimated fair value 20,000 Impairment loss 1,600 Book value after impairment loss: 20,000 Residual value: 2,000 Useful life left: 3 (20,000-2,000)*3/6=9,000

  34. End of Chapter 6

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