1

Depreciation, Impairments, and Depletion

()
()

GAAP Matching Principle

Going-concern assumption
Accounting Period assumption
ELEMENTS



:
Cost
Salvage value (Residual Value/Scrap Value)
(, NRV)
CSDepreciation BaseDepreciable Cost
*
1.
2. S.VC/(N1)
S.VC/10
:(useful life ;service life)

a.
(Physical factors)
1.
2.

(Functional factors)
1.(Inadequacy)
2.(Super session)
3.(Obsolescence)

b. v.s.

(ex:) (ex:)

1. Economic lifePhysical life

2.
3. Physical life
Economic life
4.

useful life

useful lifehours
useful lifeunits

:
Cost Allocation Activity Method

InputEx (working hours methods)

OutputEx (product units methods)

Average-straight-line method (S.L)

Time Basis

Sum-of-Years-Dight (SYD)

Decreasing
(Accelerate)

Depreciation
Method

Fix-Percentage-on-Declining Base (FDB)

Double-Declining-Balance method (DDB)
Modified Accelerate Cost Recovery System (MACRS)

Inventory Methods

Retirement Methods
Special Method Replacement Methods

Group Depreciation Methods

Composite-life (Depreciation) methods

Activity Basis (Variable Charge Approach)

Depreciation= f (/)
(+)
Useful life: 1) Output (unit of production)
2) Input (number of hours)
(Service Hours Method)
CS
Actual hrs.
Total Hours

(Units-of-Output Method)
CS
Actual Units
Total Units
{ }Cost=$5,500 Salvage
Value=$500 40,000
12,000

5,500 500
40,000

12,000 = 1,500

1.(usage)

2.

1.
2.

Time Basis
(1) (Straight-line method, S.L)
Depreciation fTime

CS
N
Depreciation Expense
Depreciation rate =
Cost
Depreciation =

1.
2.

3. ROI
ROI =

N/I
Rev * Exp( Depr.)*
=
Assets
Assets

ROI
ROI
$500,000$50,000 5
5 (ROI)
ROI 200%

0
$ 500,000
1 $ 90,000
410,000
$ 100,000
24.4%
2
90,000
320,000
100,000
31.2%
3
90,000
230,000
100,000
43.5%
4
90,000
140,000
100,000
71.4%
5
90,000
50,000
100,000
200.0%
(2) (Decreasing Charge Method)
Accelerated depreciation method ()
Sum-of-Years dight (SYD)
( N j + 1)
N ( N + 1)
1 + ... + N =
1 + ... + N
2
Fixed-Percentage-on-Declining-Base method (FDB)
S
D j = B.V j d
d = 1 n
C
cd
c (1 d ) d
D j = (C S )

c (1 d )

c (1 d ) 2

c (1 d ) = S
n
(1 d ) = S / C
1 d = n S /C
d = 1 n S /C

{}Cost$500,000Useful life5 Salvage Value$50,000

d = 1 5 50,000 / 500,000 = 1 63.09% = 36.91%

Y1
Y2
Y3
Y4
Y5

500,000 36.91%=184,550
(500,000184,550)36.91%=116,433
(500,000-300,983) 36.91%=73,457
(500,000-374,440) 36.91%=46,344

$184,550
300,983
374,440
420,784
450,000

500,000-420,784-50,000=29,216
Double-Declining Depreciation Method (DDB)

D j = B.V j
( 2 )
N
Dn = B.V S .V (n )
{}(SYD/FDB/DDB)
$5,500 4 Salvage Value=$500
SYDFDBDDB Depreciation
Expense

Y1: (5,500500)4/10=2,000
Y2: (5,500500)3/10=1,500
Y3: (5,500500)2/10=1,000
Y4: (5,500500)1/10=500

d = 1 4 500 / 5,500 = 1 54.91% = 45.09%

Y1
Y2
Y3
Y4

5,50045.09%2,480
(5,5002,480)45.09%1,362
(5,5003,842)45.09%748
5,5004,590500410

Y1
5,5002/42,750
Y2
(5,5002,750)2/41,375
Y3
(5,5004,125)2/4688
Y4
5,5004,813500187

$2,480
3,842
4,590
5,000

$ 2,750
4,125
4,813
5,000

1) Depr.
2) Repair
3)

ROI
ROI =

NI (= Rev Dep.)
Assets

ROI =

NI (= Rev Dep. Repair )

Assets

ROI

Special Depreciation Methods

(1) (Inventory Method)

R.C.
Ex

{} 500 @$300 450

$250
500300-450250=37,500
37,500

37,500

(2) (Retirement & Replacement Method)

life
Ex:

Retirement Method
Replacement Method

1.Dep. Exp.

Example

Old Cost: $150,000 S.V: $20,000 New Cost: $180,000

2. Entry

=$150,000-$20,000
=$130,000
130,000

20,000

150000

3.

=$180,000-$20,000
=$160,000
160,000

160,000

180,000
180,000

(3) (Group) & (Composite) Method

Accumulate Depreciation

Group

Composite

1) Plant Asset
2) Useful life or S.V.

{}
Assets
Cost
S.V
Useful life
Depr.Exp.
A
$ 100,000
$ 0
5
$ 20,000
B
200,000
5,000
10
19,500
C
300,000
20,000
7
40,000
$ 600,000
$ 25,000
$ 79,500
D
$ 400,000
$ 10,000
6
=$79,500/$600,000=13.25%
$575,000/$79,500=7.23
(a)
79,500

79,500

(b) B $50,000
50,000

150,000

B
200,000
(c) D
D
400,000

400,000

125,000/800,000=15.625%
(d)
125,000

125,000

{}
$1,800,000 3
$300,000 Group Method , S.L
$1,800,000
$2,000,000$1,300,000

(a)

9,000,000
9,000,000

[(1,800,000 300,000) / 3] 5
d=
= 27.78%
9,000,000
(b)
2,500,000

2,500,000

2,500,000

2,500,000

(c)
1,800,000

3,600,000

5,400,000

(d)
2,000,000

2,000,000

(e)
1,555,680

1,555,680*

10

($9,000,000-5,400,000+2,000,000)
27.78%=1,555,680

(f)
1,300,000

2,955,680

1,344,320

5,600,000

1.
5/10~12/31
S.L
=
=

7 23
12

41
= 3
12
SYD
( N j + 1)
D j = (C S )
j
1 + ... + N
72
= D1 3
12
4 13
72
+ D2 3
= D1
12
12

DDB

D j = B.V j
j
N
72
= D1 3
12
41
72
= D1 3 + D2 3
12
12

Ex 1
15 15
15
15
15

11

2
6/30 6/30
6/30
6/30
6/30
3
{}
2001/08/17 $5,500 useful life 4 Salvage
value$500 SYD DDB

SYD
2001($5,500$500) 4/104/12=$667
2002$5,0004/108/12$5,0003/104/12=$1,833
2003$5,0003/108/12$5,0002/104/12=$1,333
2004$5,0002/108/12$5,0001/104/12=$833
2005$5,0001/108/12=$334
DDB

Y1
$ 2,750
5,5002/42,750
Y2
4,125
(5,5002,750)2/41,375
Y3
4,813
(5,5004,125)2/4688
Y4
5,000
5,5004,813500187
2001$2,7508/12=$917
2002$2,7508/12+$1,3754/12=$2,292
2003$1,3758/12+$6884/12=$1,146
2004$6888/12+$1874/12=$521
2005$1878/12=$124
2.

3.

12

a) (Changes in Accounting Principle)

Cumulative Effect of a Change in Accounting

{}$5,500useful life 4 $500

S.L()
SYD()
$ 1,250
$ 2,000

1,250
1,500

$ 2,500
$ 3,500

1,000
1,000

b) (Changes in Estimate)

{}$5,500useful life 4 Salvage Value $500

S.L 3
$300
($5,500$500)/42=$2,500
($5,500$2,500$300)/3=$900

{}
Cost$5,500 S.V$500 N4

13

1. SYDSL
2. 3 S.V.0

1,000

1,000
S.L()
$ 1,250
1,250
$ 2,500

SYD()
$ 2,000
1,500
$ 3,500

($5,500$2,500)/3=$1,000
1,000

1,000

c) (Correction of Error)
PPA

{}

5,500
5,500

5,500

2,500

3,000

(Impairment)
FASB No.121

(1)
(2)
(3)

Impairment (not recoverable)

14

1. (review) Impairment
2. recoverability test

3. Impairment Loss
Step I:
a.
b.
c.
d.
e.
Step II: Recoverability Test
1.
(Impairment)
2.

Step III: Impairment Loss

Impairment Loss= (B.V.)(F.V.)
1. (market value)
2. P.V.()P.V.

(a)

B.V300,000

Net Cash Net Cash Net Cash

100,000 50,000 30,000

B.V.300,000180,000
F.V.100,000
p1,i50,000p2,i30,000p3,i
(b) $120,000$100,000$90,000
B.V.300,000310,000

Loss on Impairment()

15

Accumulate Depreciation()

Loss on Impairment Extraordinary Item

Impairment Assets Impairment

i
Impairment Assets
(1) (Assets held for use)
Impairment LossCarrying AmountFair Value
(Fair Value)
Impairment Loss (Restoration)
(2) (Asset held for disposal)
Impairment LossCarrying AmountNRV

Loss on Impairment
Accumulate Depreciation or Asset

Impairment Loss (Restoration)

* Loss ( Carrying
Value )
*Accumulate Depreciation or Asset
Loss on Impairment

{}
2001 20
$500$800,000 8
$100,0002004
2006

2004 2005
$9,000,000$5,500,000 2005
$150,000
2004
$400,000
2001 2004 1/1

2006 1/1

16

Q=20 C=800,000
R=9,000,000
N=8 S.V.=100,000
C=5,500,000
S.V.=150,000/
I.
B.V.=(800,00020)[(800,000100,000)/8320]10,750,000
=9,000,0005,500,0002 150,00020
=10,000,000

II.
M.V= 400,000208,000,000
10,750,000
B.V=
Loss
(2,750,000)
III.
2,750,000
2,750,000

(
)

17

(Depletion)

(1)
(2)
a)
b)
()
Acquisition Cost

Undeveloped

Property

a. If
Undeveloped
Property

b. If

a.

b.

()
1. (Cost Depletion Method)
Activity Method
Total Cost S .V
Depletion Expense =

Depletion Expenses
Depreciation Expense

2. (Percentage Depletion Method)

(Statutory depletion)
96

(1)
or
(2)
=
50%

18

Sales

50%

{}
$500,000$200,000
$500,000 10,000,000
$200,000 500,000
$1,500,000$1,000,000 12.5%
(a)
1,200,000 200,000
500,000 = 50,000
10,000,000
(b)

1,500,000 12.5%187,500

(1,500,0001,000,000) 50%250,000
$187,500

()

()

()
1) Estimating recoverable reserve

2) Discovery Value
Discovery Value Accounting oil gas Other resource

Reserve Recognition AccountingRRAoil gas

business

19

()

Assets
Unrealized Appreciation

Discovery Value NRV

3) Liquidating Dividends

()
Dr. Addition Paid-in Capital

Dr. Retained Earnings

{}:

a.
Asset $ $
A.D.
$
$
b.
*

(1) =

(2) =

20

(3) =

[] (MACRS)
1.
2.
3.S.V0
4.
5. DDB SL
DDB S.L
S.L DDB SL
{}$100,000 NTax5

Year
1 (1/2)
2
3
4
5
6 (1/2)

DDB100,0002/51/220,000
SL100,000/51/210,000
DDB80,0002/532,000
SL80,000/4.5 17,778
DDB48,0002/519,200
SL48,000/3.5 13,714
DDB28,8002/511,520
SL28,800/2.5 11,520
SL28,800/2.511,520
SL28,800/2.51/25,760

20%
32%
19.2%
11.52%
11.52%
5.76%