Depreciation
A. Shows the amount of value an asset
loses over time
B. Is used to describe the decline in the
value of fixed assets
C. Can not be used for intangible assets
D. Means the allocation of the cost of an
asset over its useful life
E 11-4 using straight line, depreciation
expense for year two would be
A. $30,000
B. $31,500
C. $31,800
D. $31,875
E 11-4 using units of output, depreciation
expense for year two would be
A. $30,000
B. $31,500
C. $31,800
D. $31,875
E 11-4 using hours, depreciation expense
for year two would be
A. $30,000
B. $31,500
C. $31,800
D. $31,875
Indications of Asset Impairment (FAS 144)
A. Decrease in market value of equivalent assets
B. Decrease in expected future cash flows from
asset
• Legal/regulatory problems
• Increased operating costs
• Decline in demand for output (or decline in price of output)
C. Significant increase in construction costs
D. Decrease in stock price (after merger)
Evaluation of Asset Impairment
Compare expected UNDISCOUNTED net
cash flows (NCF) from asset with book
value (BV):
A. NCF > BV = No impairment
B. NCF MV = write down to PV, continue to
use/depreciate
B. PV of NCF < MV = write down to MV – evaluate
for disposal
Evaluation of Asset Impairment II
PV of NCF < MV = write down to MV –
• evaluate for disposal: Asset is would be worth
more if sold. If decision is made to sell:
• Stop depreciation, report asset at net realizable
value (MV) in separate section of Balance sheet:
“Assets to be disposed off”
Note: This is a business, NOT and accounting
decision!
Recovery of Asset Value after
Impairment
1. If asset is being used recovery of value
is ignored. No write –up permitted, once
asset has been written down.
2. If asset is being held for sale, shown at
net realizable value (NRV) asset MAY be
written up, up to original carrying value
before impairment was recognized.
Problem 11-9
1. What is the amount of asset impairment?
Problem 11-9: The entry to write
down the asset includes
A. A debit to equipment for $1.6 mil
B. A credit to equipment for $1.6 mil
C. A debit to accumulated depreciation for
$1.6 mil
D. A credit to accumulated depreciation for
$1.6 mil
Problem 11-9
What is the new depreciation expense?
Oil and Gas Exploration
• FAS 19 – suspended
• No definitive standard
• Political issue – may become interesting
again given current gasoline price situation
Answers
1. (slide 2) A
2. (Slide 3) D
3. (Slide 4) C
4. (Slide 10)
$1,600,000
5. (slide 11) D
6. (slide 12)
$1,100,000