1. Intermediate Accounting II Chapter 11
Accounting for Property, Plant and Equipment and Intangible Assets Utilization and Impairment – Part I
Intermediate Accounting II
Chapter 11

2. COST ALLOCATION: PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS
The usefulness of most long-lived, revenue-producing assets is consumed as the assets are applied to the production of goods or services.
The matching principle requires that the net cost of these assets (cost less residual value) be allocated to the years of asset use in direct proportion to the role the asset plays in revenue production.
Cost allocation for assets is known as depreciation for plant and equipment, depletion for natural resources, and amortization for intangibles.
Depreciation, depletion, and amortization are processes of cost allocation, not valuation.

3. MEASURING COST ALLOCATION
The process of cost allocation for an asset requires that three factors be established at the time the asset is put into use: (1) service life, (2) allocation base, and (3) allocation method.
The service life, or useful life, of an asset is the amount of use that the company expects to obtain from the asset before disposing of it.
Service life can be expressed in units of time or in units of activity.
Expected obsolescence can shorten service life below physical life.
Allocation base is the difference between the cost of the asset and its anticipated residual value.
The allocation method used should be systematic and rational and correspond to the pattern of asset use.
Time-based methods
Activity-based methods 

4. TIME-BASED ALLOCATION METHODS
Time-based depreciation methods allocate the depreciable base according to the passage of time.
Straight-line
Sum-of-the-years-digits
Declining balance

5. ACTIVITY-BASED ALLOCATION METHODS
Activity-based depreciation methods estimate service life in terms of some measure of productivity. Productivity could be measured in terms of output (for example, the number of units a machine will produce) or input (for example, the number of hours a machine will operate).
Units-of-production

6. SELECTING A DEPRECIATION METHOD
All methods provide the same total depreciation over an asset's life.
Activity-based methods are theoretically superior to time-based methods, but often are infeasible or too costly to use.
Most companies use the straight-line method.
Different depreciation methods may be used for different classes of assets.
Different depreciation methods may be used for financial and income tax reporting.

8. STRAIGHT-LINE DEPRECIATION
The straight-line depreciation method allocates an equal amount of depreciable base to each year of the asset's service life.
Cost – Residual Value = Base
Base/Useful Life = Annual Depreciation
Annual Depreciation/12 = Monthly Depreciation
If the period covered is less than a year, multiply the monthly depreciation by the number of months covered in the period.

9. (h)
Exercise 11–3 #1, page 624
$115,000 – 5, years = $11,000 per year
2016 $11,000 x 3/12 = $ 2,750
2017 $11,000 x 12/12 = $11,000
The asset was held for 3 months in 2016, so depreciation is calculated as 3/12 of a year.
The asset was held for the entire year of 2017, or 12/12 months.
Annual depreciation will continue to be taken for 9 years until In 2026, depreciation will only be taken for 9/12 of a year.
Journal Entry Dec 31, 2017
Depreciation Expense
11,000
Accumulated Depreciation

10. ACCELERATED METHODS
Accelerated depreciation methods allocate more depreciable base to the earlier years of an asset's life and less to the later years.
Sum-of-the-years-digits
Declining Balance

11. SUM-OF-THE-YEARS-DIGITS
The sum-of-the-years'-digits method multiplies the depreciable base by a declining fraction whose denominator is the constant sum of the digits from one to n where n is the number of years in the asset's service life.
sum-of-the-years-digits = n(n+1)

12. Brief Exercise 11–2 (b), page 622
(h)
Brief Exercise 11–2 (b), page 622
Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10 Depreciable base is $30,000 - $2,000 = $28,000
2016 $28,000 x 4/10 = $11,200
2017 $28,000 x 3/10 = $ 8,400

13. SUM-OF-THE-YEARS-DIGITS – PARTIAL YEARS
With sum-of-the-years-digits, each depreciation fraction must be taken for 12 consecutive months. When partial years are involved, this fraction is split between two fiscal periods.
For instance, an asset purchased in the beginning of August with a three year life will have the sum-of-the-years digits of 6. The first twelve month’s depreciation fraction is 3/6. 3/6 of the base will be taken for 5/12 months (August – December). In the second fiscal year, 3/6 depreciation fraction will be used for 7/12 (the number of months remaining to complete 12 consecutive months) and 2/6 will be taken for 5/12 months. The process will continue until the depreciation has been applied to 36 months of service.

14. (h)
Exercise 11–3 #2, page 624
Sum-of-the-digits is {[10 (10 + 1)]/2} = 55 Depreciable base is $115,000 - $5,000 = $110,000
2016 $110,000 x 10/55 x 3/12 = $ 5,000
2017 $110,000 x 10/55 x 9/12 = $15,000
+$110,000 x 9/55 x 3/12 = 4,500
$19,500

15. DECLINING BALANCE METHODS
Declining balance depreciation methods multiply beginning of year book value, not depreciable base, by an annual rate that is a multiple of the straight-line rate. Residual value is ignored at the beginning of the depreciation process, but the asset may not depreciate below residual value.
When 200% is used as the multiplier, the method is known as the double-declining-balance method.
Straight-line rate = 1/n Book Value = Cost – Accumulated Depreciation

16. (h)
Exercise 11–3 #3, page 624
Straight-line rate is 10% (1 ÷ 10 years) x 2 = 20% DDB rate
2016 $115,000 x 20% x 3/ = $ 5,750
2017 ($115,000 – 5,750) x 20% = $21,850

17. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Straight-line rate of 20% (1 ÷ 5 years) x 2 = 40% DDB rate.
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
40%
2017
2018
2019
2020

18. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
$13,200
$19,800
2017
2018
2019
2020

19. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
$13,200
$19,800
2017
7,920
21,120
11,880
2018
2019
2020

20. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
$13,200
$19,800
2017
7,920
21,120
11,880
2018
4,752
25,872
7,128
2019
2020

21. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
$13,200
$19,800
2017
7,920
21,120
11,880
2018
4,752
25,872
7,128
2019
2,851
28,723
4,277
2020

22. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
$13,200
$19,800
2017
7,920
21,120
11,880
2018
4,752
25,872
7,128
2019
2,851
28,723
4,277
2020
3,000
Recall that the ending book value cannot be below the asset’s estimated residual value. In the last year of service, the depreciation is calculated backwards from ending book value and the amount is “plugged”.

23. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
$13,200
$19,800
2017
7,920
21,120
11,880
2018
4,752
25,872
7,128
2019
2,851
28,723
4,277
2020
1,277
30,000
3,000
Recall that the ending book value cannot be below the asset’s estimated residual value. In the last year of service, the depreciation is calculated backwards from ending book value and the amount is “plugged”.

24. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Assume the van was purchased July 1, The first year’s depreciation would be $33,000 X .4 X 6/12 = $9,900
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
($13,200 X 6/12)
$9,900
$23,100
2017
2018
2019
2020

25. Accumulated Depreciation
(h)
Exercise 11–1 #3, page 623
Assume the van was purchased July 1, The first year’s depreciation would be $33,000 X .4 X 6/12 = $9,900
Year
Beg Book Value
Rate
Depreciation
Accumulated Depreciation
End Book Value
2016
$33,000
40%
($13,200 X 6/12)
$9,900
$23,100
2017
23,100
9,240
19,140
13,860
2018
5,544
24,684
8,316
2019
3,326
28,010
4,990
2020
1,990
30,000
3,000

26. UNITS-OF-PRODUCTION METHOD
The units-of-production method computes a depreciation rate per measure of output and then multiplies this rate by actual output to determine periodic depreciation.
Cost/Estimated Output = Depreciation Rate/Unit of Output

27. (h)
Exercise 11–3 #5, page 624
$115,000 – 5,000
220,000 units = $.50 per unit depreciation rate
,000 units x $.50 = $ 5,000
,000 units x $.50 = $12,500

28. Intermediate Accounting II – Chapter 11 END OF PRESENTATION – PART 1
Accounting for Property, Plant and Equipment and Intangible Assets Utilization and Impairment – Part I
Intermediate Accounting II – Chapter 11
END OF PRESENTATION – PART 1