1. Depreciation, Impairments, and Depletion
Intermediate Accounting, 10th Edition
Kieso, Weygandt, and Warfield
Chapter 11:
Depreciation, Impairments, and Depletion
Prepared by
Krish Ranganathan, Angelo State University
San Angelo, Texas
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

2. Methods of Depreciation
Part 1:
Methods of Depreciation
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

3. Depreciation - Concept
Depreciation is a means of cost allocation.
It is not a method of valuation.
Depreciation involves:
allocating the cost of tangible assets to expense
in a systematic and rational manner
to periods expected to benefit from use of assets
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

4. Factors in the Depreciation Process
Questions to be answered:
What is the depreciable base of the asset?
What is the asset’s useful life?
What method of cost apportionment is best for the asset in question?
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

5. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Depreciable Base
Depreciable base is the amount subject to depreciation.
It is determined as:
Original cost of the asset less
Estimated salvage or disposal value
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

6. Estimated Service Lives
An asset’s service life and physical life are not the same.
Assets are retired (from productive life) due to:
physical factors (such as casualty), or
economic factors (such as obsolescence)
Economic factors in turn include
Inadequacy (asset can not meet current demand)
Supercession (by a better asset)
Obsolescence (other factors)
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

7. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Depreciation Methods
Depreciation methods can be classified as follows:
Tax depreciation methods
Financial accounting Depreciation methods
Financial accounting methods are:
straight-line
accelerated methods, or
special methods
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

8. Depreciation Methods: Overview
Financial Accounting
Depreciation Methods
Tax
Depreciation
Straight-line
method
Activity
method
Accelerated
methods
Special
methods
1. Declining Balance
2. Sum-of-the-years’ digits
1. Composite method
2. Hybrid methods
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

9. Depreciation Methods: Example
Amber corporation buys a truck on January 1, Information relating to the truck is as follows:
Cost, $34,000
Estimated service life, 5 years (or 60,000 miles)
Salvage value end of five years or use, $4,000
Actual miles driven:
20,000 miles (in 2000); 15,000 miles (in 2001)
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

10. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Straight-line method
1. Depreciable base = $34,000 less $4,000 = $30,000
2. Annual depreciation = $30,000 / 5 years = $6,000
3. Depreciation Schedule: (years 1 and 2)
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34,000 $6,000 $6,000 $28,000
2 $28,000 $6,000 $12,000 $22,000
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

11. Activity method (unit = mile)
1. Depreciable base = $34,000 less $4,000 = $30,000
2. Depreciation per mile = $30,000 / 60,000 = $0.50
3. Depreciation (2000) = $0.50 * 20,000 miles = $10,000
4. Depreciation Schedule: (years 1 and 2)
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34,000 $10,000 $10,000 $24,000
2 $24,000 $ 7,500 $17,500 $16,500
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

12. Sum-of-the-years’-digits (SYD) method
1. Depreciable base = $34,000 less $4,000 = $30,000
2. SYD fraction = ( ) = 15
3. Depreciation (2000) = $30,000 * (5/15) = $10,000
Depreciation (2001) = $30,000 * (4/15) = $ 8,000
Depreciation (2002) = $30,000 * (3/15) = $ 6,000
Depreciation (2003) = $30,000 * (2/15) = $ 4,000
Depreciation (2004) = $30,000 * (1/15) = $ 2,000
Decreasing Fractions
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

13. Sum-of-the-years’-digits (SYD) method
4. Depreciation Schedule
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34, $10,000 $10,000 $24,000
2 $24, $ 8,000 $18,000 $16,000
3 $16, $ 6,000 $ 24,000 $10,000
4 $10, $ 4,000 $ 28,000 $ 6,000
5 $ 6, $ 2,000 $ 30,000 $ 4,000
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

14. Double Declining balance method
1. Rate of depreciation = 2 * (1/5) = 0.40
2. Depreciation (2000) = $34,000 * = $ 13,600
Depreciation (2001) = $20,400 * = $ 8,160
Depreciation (2002) = $12,240 * = $ 4,896
Depreciation (2003) = $ 7,344 * = $ 3,344
Depreciation (2004) = none
Total depreciation taken = $ 30,000
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

15. Double declining balance method
3. Depreciation Schedule
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34, $13,600 $13,600 $20,400
2 $20, $ 8,160 $21,760 $12,240
3 $12, $ 4,896 $ 26,656 $ 7,344
4 $ 7, $ 3,344 $ 30,000 $ 4,000
5 $ 4, $ none $ 30,000 $ 4,000
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

16. Group and Composite Depreciation Methods
The group method is applied to a collection of assets similar in nature.
The composite method is applied to a collection of assets dissimilar in nature.
The composite depreciation rate is determined as follows:
total of annual depreciation for all assets
total cost of all assets
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

17. Composite Depreciation Method: Example
Given the following information relating to fixed assets, A and B:
Asset Cost Annual depreciation
A $20,000 $ 4,000
B $36,000 $10, $56,000 $14,000
Composite depreciation rate is: $14,000 / $56, = 25%
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

18. Partial year depreciation
When an asset is bought sometime during the year, a partial depreciation charge is required.
The procedure is:
determine depreciation for a full year, and
allocate the amount between the two periods affected (see example ==> )
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

19. Partial year depreciation: Example
Amber corporation buys a truck on July 1, Information relating to the truck is as follows:
Cost, $10,000
Estimated service life, 5 years
Salvage value end of five years, none.
Determine depreciation expense under the double declining balance method.
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

20. Partial year depreciation: Example
Before allocating depreciation, determine full year depreciation as follows:
First full year (2000) ==> $10,000 * 40% = $4,000
Second full year (2001) ==> $ (10,000 - $4,000) * 40% = $2,400
And so on for the remaining years
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

21. Partial year depreciation: Example
Double declining: date of purchase, July 1, 2000
Allocate first full year’s
depreciation of $4,000
between 2000 and 2001
$2,000
Allocate second full year’s
depreciation of $2,400
between 2001 and 2002
$1,200
2000
2001
2002
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

22. Revision of Depreciation Estimates
Determination of depreciation involves initial estimates (life, salvage value.)
When these estimates are revised, we re- compute depreciation.
These revised depreciation expenses apply prospectively to the remaining life of asset
These changes do not affect prior periods.
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

23. Revision of Depreciation Estimates: Example
Amber corporation buys a depreciable asset on January 1, 2000 for $95,000.
Estimated life was 20 years.
Estimated salvage value was $5,000.
On January 1, 2006, estimates were revised as follows:
salvage value, $2,000
estimated life : 24 years (years 2000 through 2023)
Determine depreciation for 2006 based on straight line method of depreciation.
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

24. Revision of Depreciation Estimates: Example
Accumulated depreciation to date of revision of estimates:
($95,000 - $5,000) / 20 years = $4,500 dep
$4,500 * 6 years = $27,000 accumulated depr.
Amount to be depreciated (years 2006 through 2023 = 18 years)
($95,000 - $27,000 - $2,000) / 18 years
= $3,667 (rounded) annual depreciation
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

25. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Part 2:
Impairments
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

26. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Impairments
An impairment occurs when:
the carrying amount of an asset is not recoverable, and
a write-off of the impaired amount is needed
To determine the amount of impairment, a recoverability test is used (see next slide)
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

27. Impairments: The Recoverability Test
Sum of expected
future net cash flows
from use and disposal
of asset is less than
the carrying amount
Sum of expected
future net cash flows
from use and disposal
of asset is
equal to or more than
the carrying amount
Impairment has occurred
No impairment
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

28. Impairments: The Recoverability Test
Impairment has occurred
Loss =
Carrying amount
less
Fair value of asset
Yes
Determine
impairment loss
Does an active market
exist for the asset?
Loss =
Carrying amount
less
present value of
expected net cash
flows No
Use company’s market
rate of interest
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

29. Impairment: Accounting
Impairment has occurred
Assets are held
for use
Assets are held
for sale
1. Loss = Carrying value
less Fair value
2. Depreciate new cost basis
3. Restoration of impairment
loss is NOT permitted
1. Loss = Carrying value
less Fair Value less
cost of disposal
2. No depreciation is taken
3. Restoration of impairment
loss is permitted
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

30. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Part 3:
Depletion
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

31. Depletion: Terminology
Depletion refers to the cost basis write-off of natural resources
Natural resources are characterized by:
complete removal of the asset, and
replacement of the asset only by an act of nature
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

32. Determining the Depletion Base: Factors
Types of Costs
What they are
Acquisition cost
Exploration costs
Development costs (Tangible costs): not part of depletion base
Development costs (Intangible costs)
Restoration costs
Price paid to search for and find deposit of the natural resource
Costs incurred to find the natural resource
Costs of heavy equipment for extracting and shipping natural resource.
Drilling costs, tunnels, and shafts
To restore after extraction
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

33. Accounting for Exploration Costs
Exploration costs are usually expensed as incurred
These costs are capitalized when:
they are substantial, and
uncertainty exists regarding finding the natural resource
Two competing approaches are employed in practice to account for exploration costs (next slide)
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

34. Accounting for Exploration Costs
The two approaches are:
Successful efforts approach, and
Full cost approach
Under the successful efforts concept, only exploration costs of successful projects are capitalized.
Under the full cost concept, all costs are capitalized.
Either approach is currently acceptable.
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

35. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Special Problems
Difficulty of estimating recoverable reserves
Problems of discovery value
Accounting for liquidating dividends
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

36. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
Part 4:
Tax Depreciation
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

37. Overview of Depreciation
Financial Accounting
depreciation
Tax Depreciation
methods
Depreciation Methods
Up to 1980-end, same as
financial methods.
Beginning with 1981,
tax methods changed.
1. Straight line
2. Double declining bal
3. Sum of the years
4. Units of production

38. Tax Depreciation Methods
The current tax depreciation rules are called Modified Accelerated Cost Recovery System (MACRS)
MACRS usually produces greater tax deductions earlier in the asset’s life.
Differences between tax and GAAP depreciation deductions produce timing differences for deferred tax purposes
Differences between the MACRS and GAAP depreciation amounts are reconciled in the M-1 and M-2 schedules (tax return)

39. MACRS (1987 and later) MACRS incorporated recovery periods for assets
Assets can be either personalty, or realty, or intangible assets
For personalty, the recovery periods are: 3 [years], 5, 7, 10, 15, and 20 years
For residential and non-residential real estate, recovery periods range from 27.5 to 39 years.
For intangibles, the recovery period is fifteen years.

40. Taking section 179 expensing option
Before we compute depreciation, we can take a
one-time deduction of $20,000 in 2000 in addition
to the annual tax depreciation.
The depreciable cost is then
reduced by the $20,000 one-time
write-off.

41. Section 179 expensing option for personalty
TP can expense up to a maximum of $20,000 per year of cost of assets placed in use in 2000.
The election applies to TANGIBLE personalty used in trade or business ONLY.
The election does NOT apply to either realty or to property used for the production of income.
The limit applies separately for each year.

42. Section 179 expensing option for personalty
The initial write-off ($20,000) is reduced for “excess” assets dollar for dollar.
If you place in service assets exceeding a total cost of $200,000, you lose $1 in write-off for every dollar of excess assets.
11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

43. Section 179 expensing amounts
Tax year Annual Limit
$18,500
$19,000
$20,000
2001 or $24,000
2003 and thereafter $25,000
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

44. MACRS (1987 and later): Example
Taxpayer buys a computer on July 23, The cost is $69,000.
Determine the tax depreciation deduction for the asset under MACRS.
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Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)

45. Example
Taxpayer buys a computer on July 23, The cost is $69,000.
Is 5-year
property
MACRS
applies
Entire
cost is
recovered

46. Taking the expensing option ….
Taxpayer buys a computer on July 23, 2000.
The cost is $69,000.
Original cost = $69,000
less: one-time expensing = ($20,000)
Adjusted basis: = $49,000
subject to tax depreciation

47. Computing MACRS depreciation ….
MACRS: 5-year personalty
Year 5-year Depreciation
1 [2000] % 49,000* 0.20
2 [2001] % 49,000* 0.32
3 [2002] % 49,000*
4 [2003] %* 49,000*
5 [2004] % 49,000*
6 [2005] % 49,000*
100.00%
= $49,000 total

48. Summing up the expensing option and MACRS depreciation ….
Depreciation deduction in 2000: (first year)
One-time expensing = $ 20,000
MACRS depreciation [1999] = $ 9,800
Total cost recovery = $ 29,800 total

49. Summing up the expensing option and MACRS depreciation ….
Depreciation deduction in 2001: (second year)
[no further expensing allowed]
(49,000 * 0.32)
MACRS depreciation [2001] = $ 15,680

50. Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)
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11/8/2018
Intermediate Accounting, 10th Edition, Ch. 11 (Kieso et al.)