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Partial Year Depreciation, Disposals, and Impairment Chapter 8 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

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Presentation on theme: "Partial Year Depreciation, Disposals, and Impairment Chapter 8 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc."— Presentation transcript:

1 Partial Year Depreciation, Disposals, and Impairment Chapter 8 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

2 Accelerated Depreciation Depreciation Repair Expense Early Years High Low Later Years Low High Accelerated depreciation matches higher depreciation expense with higher revenues in the early years of an assets useful life when the asset is more efficient.

3 Declining-Balance Method Annual Depreciation expense Net Book Value () Useful Life in Years 2 = × Cost – Accumulated Depreciation Declining balance rate of 2 is double-declining- balance (DDB) rate. Annual computation ignores residual value. At the beginning of the year, Southwest purchased equipment for $62,500 cash. The equipment has an estimated useful life of 3 years and an estimated residual value of $2,500. Calculate the depreciation expense for the first two years.

4 Annual Depreciation expense Net Book Value () Useful Life in Years 2 = × () $62,500 × 3 years 2 = $41,667 () ($62,500 – $41,667) × 3 years 2 = $13,889 Declining-Balance Method Year 1 Depreciation: Year 2 Depreciation:

5 () ($62,500 – $55,556) × 3 years 2 = $4,629 Below residual value Declining-Balance Method

6 Depreciation expense is limited to the amount that reduces book value to the estimated residual value. Declining-Balance Method

7 Work on E8-7 Do E8-8 with the following Changes: – Stamping Machine was purchased on October 1 and not at the beginning of the year.

8 Partial Year Depreciation You only depreciate an asset for the time you own it. For Straight-line Depreciation: first year and last year will be partial years. For Units of Production: usage is adjusted by actual units produced each year. For Double Declining Balance: in first year, calculate annual depreciation, then multiply by percentage of year.

9 Measuring Asset Impairment Impairment is the loss of a significant portion of the utility of an asset through... Casualty. Obsolescence. Lack of demand for the assets services. Recognize a loss when an asset suffers a permanent impairment. Test of Impairment: Compare Book Value to Future Cash Flows Record Impairment: Loss = difference between Book Value and Fair Market Value

10 Impairment Problem Mike Company purchased an asset on January 1, 2005 for $500,000. It was expected to have a ten year useful life with zero residual value. At December 31, 2010 determined that the future cash flows of the asset were estimated to be $100,000 and the fair market value of the asset is $175,000. Determine if an asset has been impaired and if, so, prepare the journal entry to record the impairment.

11 Types of Asset Disposals Disposal of Property, Plant and Equipment Voluntary disposals: Sale Trade-in Retirement Involuntary disposals: Fire Accident Disposal of Property, Plant and Equipment Voluntary disposals: Sale Trade-in Retirement Involuntary disposals: Fire Accident

12 Disposal of Property, Plant, and Equipment Journalize disposal by: Writing off accumulated depreciation (debit). Writing off the asset cost (credit). Recording cash received (debit) or paid (credit). Recording a gain (credit) or loss (debit). Update depreciation to the date of disposal.

13 If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Disposal of Property, Plant, and Equipment Southwest Airlines sold flight equipment for $5,000,000 cash at the end of its 17th year of use. The flight equipment originally cost $20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of 20 years. Lets answer the following questions. Southwest Airlines sold flight equipment for $5,000,000 cash at the end of its 17th year of use. The flight equipment originally cost $20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of 20 years. Lets answer the following questions.

14 The amount of depreciation expense recorded at the end of the 17th year to bring depreciation up to date is: a.$0. b.$1,000,000. c.$2,000,000. d.$4,000,000. The amount of depreciation expense recorded at the end of the 17th year to bring depreciation up to date is: a.$0. b.$1,000,000. c.$2,000,000. d.$4,000,000. Annual Depreciation: ($20,000,000 - $0) ÷ 20 Years. = $1,000,000 Disposal of Property, Plant, and Equipment

15 After updating the depreciation, the equipments book value at the end of the 17th year is: a.$3,000,000. b.$16,000,000. c.$17,000,000. d.$4,000,000. After updating the depreciation, the equipments book value at the end of the 17th year is: a.$3,000,000. b.$16,000,000. c.$17,000,000. d.$4,000,000. Accumulated Depreciation = (17yrs. × $1,000,000) = $17,000,000 BV = Cost - Accumulated Depreciation BV = $20,000,000 - $17,000,000 = $3,000,000 Disposal of Property, Plant, and Equipment

16 The equipments sale resulted in: a.a gain of $2,000,000. b.a gain of $3,000,000. c.a gain of $4,000,000. d.a loss of $2,000,000. The equipments sale resulted in: a.a gain of $2,000,000. b.a gain of $3,000,000. c.a gain of $4,000,000. d.a loss of $2,000,000. Gain = Cash Received - Book Value Gain = $5,000,000 - $3,000,000 = $2,000,000 Disposal of Property, Plant, and Equipment

17 Prepare the journal entry to record Southwests sale of the equipment at the end of the 17th year. Disposal of Property, Plant, and Equipment

18 Disposal with a partial year depreciation Mike Company purchased an asset on March 31, 2009 at a cost of $150,000. It was expected to have a 5 year useful life and a $30,000 residual value. The company uses straight-line depreciation. On November 1, 2012 the company sold the asset for $60,000. Prepare the journal entry to record the sale of this asset on November 1, How would your answer be different if the company had used Double Declining Balance depreciation rather than straight-line? Prepare the journal entry.


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