|
 

| 
   
 


÷

 a
 

When the carrying amount of an asset is not

recoverable, a company records a write-off referred
to as an 
 .

 
 
a. Decrease in the market value of an asset.
b. Change in the manner in which an asset is used.
c. Adverse change in legal factors or in the business climate.
d. An accumulation of costs in excess of the amount originally
expected to acquire or construct an asset.
e. A projection or forecast that demonstrates continuing losses
associated with an asset.
 a
 

a
 

à. Review events for possible impairment.
2. If the review indicates impairment, apply the
recoverability test. If the sum of the expected future
net cash flows from the long-lived asset is less than the
carrying amount of the asset, an impairment has
occurred.
3. Assuming an impairment, the impairment loss is the
amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value is
the market value or the present value of expected
future net cash flows.
a
 

a

a
 
 a
 
a
  Vresented below is information related to
equipment owned by Vujols Company at December 3à, 20à0. Assume
that Vujols will continue to use this asset in the future. As of
December 3à, 20à0, the equipment has a remaining useful life of 4
years.
  
   
    
!
    "  # $
%   &&
Instructions:
Vrepare the journal entry (if any) to record the impairment of the
asset at December 3à, 20à0.
Vrepare the journal entry to record depreciation expense for 20àà.
The fair value of the equipment at December 3à, 20àà, is $5,à00,000.
Vrepare the journal entry (if any) necessary to record this increase in
fair value.
 a
 

+ 
 
  
'   (
  
)   
  *

à2/3à/à0

2oss on impairment 3,600,000

Accumulated depreciation 3,600,000
 a
 

+ ,    

-   
.
  
 

à2/3à/àà

Depreciation expense à,à00,000

Accumulated depreciation à,à00,000

 + Restoration of any impairment loss is not permitted.

 


Ô  , often called wasting assets,

include petroleum, minerals, and timber.
They have two main features:
à. complete removal (consumption) of the asset, and
2. replacement of the asset only by an act of nature.


 is the process of allocating the cost of

natural resources.
 

    
/

Computation of the depletion base involves four factors:
(à) Acquisition cost of the deposit,
(2) Exploration costs,
(3) Development costs, and
(4) Restoration costs.
 


 0
  


Ôormally, companies compute depletion on a 


    (an activity approach). Thus,
depletion is a function of the number of units extracted
during the period.
Calculation:
Total cost ² Salvage value
= Depletion cost per unit
Total estimated units available

Units extracted x Cost per unit = Depletion

 
    
   pernandez Timber
Company owns 9,000 acres of timberland purchased in à999 at a
cost of $à,400 per acre. At the time of purchase the land without
the timber was valued at $400 per acre. In 2000, pernandez built
fire lanes and roads, with a life of 30 years, at a cost of $87,000.
Every year pernandez sprays to prevent disease at a cost of
$3,000 per year and spends $7,000 to maintain the fire lanes and
roads. During 200à, pernandez selectively logged and sold 700,000
board feet of timber, of the estimated 3,000,000 board feet. In
2002, pernandez planted new seedlings to replace the trees cut at
a cost of $à00,000.
Instructions:
Determine the depreciation expense and the cost of timber sold
related to depletion for 200à.
 
    
  

÷
 


      
   
÷
  

    
 
    
  

÷
 
 

 


 


 







 

 



 








  


  


 


 



 

 
!
 

 


"
 

 

  


  

#
 




 0

 0



î Same as accounting for changes in estimates.

î Revise the depletion rate on a prospective basis.

î Divides the remaining cost by the new estimate of the

recoverable reserves.
 


21 
 
 Dividends greater than the
amount of accumulated net income.

 
  Callahan Mining had a retained earnings

balance of $à,650,000 and paid-in capital in excess of par
of $5,435,493. Callahan·s board declared a dividend of $3
a share on the à,000,000 shares outstanding. It records
the $3,000,000 cash dividend as follows.

Retained Earnings à,650,000

Vaid-in Capital in Excess of Var à,350,000
Cash 3,000,000
 


|| 


il and Gas Industry:

Full cost concept

Successful efforts concept

 V 
    



V 
 V  

V  1
 Ô  0
 

Depreciating assets, use Accumulated Depreciation.
Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.

„asis of valuation (cost)

Vledges, liens, and other commitments
Depreciation expense for the period.


 

„alances of major classes of depreciable assets.
Accumulated depreciation.
A description of the depreciation methods used.


  



The


 
 is a measure of a firm·s ability to
generate sales from a particular investment in assets.

 
 

2




The  on sales is a measure of the ability to

generate operating income from a particular level of sales.

2
 
 




00 measures a firm·s success in using

assets to generate earnings.

22
 
 


   



The analyst obtains further insight into the behavior of RA

by 
   it into components of profit margin on
sales and asset turnover as follows:

Rate of Return Vrofit Margin on Asset

= x
on Assets Sales Turnover

Ôet Income Ôet Income Ôet Sales

= x
Average Total Assets Ôet Sales Average Total Assets




The analyst obtains further insight into the behavior of RA

by  it into components of profit margin on
sales and asset turnover as follows:

Rate of Return Vrofit Margin on Asset

= x
on Assets Sales Turnover

$64.2 $64.2 $420.à

= x
($8àà.8 + 665.3) / 2 $420.à ($8àà.8 + 665.3) / 2

8.7% = à5.28% x .569

î Under both iGAAV and U.S. GAAV, interest costs incurred during
construction must be capitalized.

î iGAAV, like U.S. GAAV, capitalizes all direct costs in self-

constructed assets.

î The accounting for exchanges of nonmonetary assets has recently

converged between iGAAV and U.S. GAAV.

î iGAAV permits the same depreciation methods (straight-line,

accelerated, units-of-production) as U.S. GAAV.
î As discussed in the Chapter 4 Convergence Corner, iGAAV permits
asset revaluations (which are not permitted in U.S. GAAV).
Consequently, companies that use the revaluation framework must
follow revaluation depreciation procedures.

î iGAAV also uses a fair value test to measure the impairment loss.
powever, iGAAV does not use the first-stage recoverability test
used under U.S. GAAVcomparing the undiscounted cash flows to
the carrying amount. Thus, the iGAAV test is more strict than U.S.
GAAV.