Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Chapter 7: Property, Plant, and Equipment, Investment

Property, and Intangible Assets: Utilization and
Impairment

Questions for Review of Key Topics

Question 7-1
The terms depreciation, depletion, and amortization all refer to the process of allocating the
cost of long-lived tangible assets and finite-life intangible assets to periods of use. The only
difference between the terms is that they refer to different types of these long-lived assets;
depreciation for plant and equipment, depletion for natural resources, and amortization for
intangibles.

Question 7-2
The term depreciation often is confused with a decline in value or worth of an asset.
Depreciation is not measured as decline in value from one period to the next. Instead, it involves
the distribution of the cost of an asset, less any anticipated residual value, over the asset’s estimated
useful life in a systematic and rational manner that attempts to match revenues with the use of the
asset.

Question 7-3
The process of cost allocation for long-lived tangible assets and finite-life intangible assets
requires that three factors be established at the time the asset is put into use. These factors are:
1. Service (useful) life—The estimated use that the company expects to receive from the asset.
2. Allocation base—The value of the usefulness that is expected to be consumed.
3. Allocation method—The pattern in which the usefulness is expected to be consumed.

Question 7-4
Physical life provides the upper bound for service life. Physical life will vary according to the
purpose for which the asset is acquired and the environment in which it is operated. Service life
may be less than physical life for several reasons. For example, the expected rate of technological
changes may shorten service life. Management intent also may shorten the period of an asset’s
usefulness below its physical life. For instance, a company may have a policy of using its delivery
trucks for a three-year period before trading the trucks for new models.

Question 7-5
The total amount of depreciation to be recorded during an asset’s service life is called its
depreciable base. This amount is the difference between the initial value of the asset at its
acquisition (its cost) and its residual value. Residual or salvage value is the amount the company
expects to receive for the asset at the end of its service life less any anticipated disposal costs.

7-1
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Question 7-6
Activity-based allocation methods estimate service life in terms of some measure of
productivity. Periodic depreciation or depletion is then determined based on the actual productivity
generated by the asset during the period. Time-based allocation methods estimate service life in
years. Periodic depreciation or amortization is then determined based on the passage of time.

Question 7-7
The straight-line depreciation method allocates an equal amount of depreciable base to each
year of an asset’s service life. Accelerated depreciation methods allocate higher portions of
depreciable base to the early years of the asset’s life and lower amounts of depreciable base to later
years. Total depreciation is the same by either approach.

Question 7-8
Theoretically, the use of activity-based depreciation methods would provide a better matching
of revenues and expenses. Clearly, the productivity of a plant asset is more closely associated with
the benefits provided by that asset than the mere passage of time. However, activity-based methods
quite often are either infeasible or too costly to use. For example, buildings do not have an
identifiable measure of productivity. For assets such as machinery, there may be an identifiable
measure of productivity, such as machine hours or units produced, but it is more costly to determine
the amount each period than it is to simply measure the passage of time. For these reasons, most
companies use time-based depreciation methods.

Question 7-9
Companies might use the straight-line method because they consider that the benefits derived
from the majority of plant assets are realized approximately evenly over these assets’ useful lives. It
also is the easiest method to understand and apply. The effect on net income also could explain why
so many companies prefer the straight-line method to the accelerated methods. Straight-line
produces a higher net income in the early years of an asset’s life. Net income can affect bonuses
paid to management, or debt agreements with lenders. Income taxes are not a factor in determining
the depreciation method because a company is not required to use the same depreciation method for
both financial reporting and income tax purposes.

Question 7-10
The group approach to aggregation is applied to a collection of depreciable assets that share
similar service lives and other attributes. For example, group depreciation could be used for fleets
of vehicles or collections of machinery. The composite approach to aggregation is applied to
dissimilar operating assets, such as all of the depreciable assets in one manufacturing plant.
Individual assets in the composite may have diverse service lives. Both approaches are similar in
that they involve applying a single straight-line rate based on the average service lives of the assets
in the group or composite. While US GAAP permits the use of the group and composite
depreciation methods, IFRS is silent on their use. The group depreciation method, however, appears
to be consistent with the guidance in IAS No. 16 Property, Plant and Equipment that allows for
grouping of assets that have similar useful life and depreciation method for depreciation purposes.
On the other hand, the composite approach is less consistent with IAS No. 16. Specifically, IAS
No. 16 provides that approximation techniques may be used to depreciate groups of insignificant

7-2
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

assets provided that the approximation techniques faithfully represent the consumption pattern and
useful life of those assets.

Question 7-11
The allocation of the cost of a natural resource to periods of use is called depletion. The
process otherwise is identical to depreciation. The activity-based units-of-production method is the
predominant method used to calculate depletion, not the time-based straight-line method.

Question 7-12
The amortization of finite-life intangible assets is based on the same concepts as depreciation
and depletion. The capitalized cost of an intangible asset that has a finite useful life must be
allocated to the periods the company expects the asset to contribute to its revenue generating
activities. Intangibles, though, generally have no residual values, so the amortizable base is simply
cost. Also, intangibles possess no physical life to provide an upper bound to service life. However,
most intangibles have a legal or contractual life that limits useful life. Intangible assets that have
indefinite useful lives, including goodwill, are not amortized but are instead subjected to
impairment test at least on an annual basis.

Question 7-13
A company can calculate depreciation based on the actual number of days or months the asset
was used during the year. A common simplifying convention is to record one-half of a full year’s
expense in the years of acquisition and disposal. This is known as the half-year convention. The
modified half-year convention records a full year’s expense when the asset is acquired in the first
half of the year or sold in the second half. No expense is recorded when the asset is acquired in the
second half of the year or sold in the first half.

Question 7-14
A change in the service life of long-lived tangible assets and finite-life intangible assets is
accounted for as a change in an estimate. The change is accounted for prospectively by simply
depreciating the remaining depreciable base of the asset (book value at date of change less
estimated residual value) over the revised remaining service life.

Question 7-15
A change in depreciation method is accounted for prospectively by simply depreciating the
remaining depreciable base of the asset (book value at date of change less estimated residual value)
over the revised remaining service life using the new depreciation method, exactly as we would
account for a change in estimate.
Under US GAAP but not IFRS, a change in depreciation method must be justified, which is
an exception as most changes in estimate do not require a company to justify the change. However,
this change in estimate is a result of changing an accounting principle and therefore requires a clear
justification as to why the new method is preferable. A disclosure note reports the effect of the

7-3
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

change on net income and earnings per share along with clear justification for changing
depreciation methods.

Question 7-16
If a material error is discovered in an accounting period subsequent to the period in which the
error is made, previous years’ financial statements that were incorrect as a result of the error are
retrospectively restated to reflect the correction. Any account balances that are incorrect as a result
of the error are corrected by journal entry. If retained earnings is one of the incorrect accounts, the
correction is reported as a prior period adjustment to the beginning balance in the statement of
shareholders’ equity. In addition, a disclosure note is needed to describe the nature of the error and
the impact of its correction on each financial statement line item affected and earnings per share.

Question 7-17
A company should classify a property (comprising land and/or buildings) as property, plant,
and equipment (PPE) when the property is owner-occupied—held for own use in the production or
supply of goods or services or for administrative purposes. Property held for capital appreciation or
rental income is classified as investment property. However, if a company holds properties for sale
in its ordinary course of business should account for those properties as inventory.

Question 7-18
The accounting for the acquisition of a property is the same regardless of whether the
property is classified as property, plant, and equipment (PPE) or investment property. After the
initial recognition, a company can choose to account for a property classified as PPE using either
(a) the cost method or (b) the revaluation method. For investment property, a company can choose
to use either (a) the cost method or (b) the revaluation method. Under the cost method, the company
accounts for the property at its original cost less accumulated depreciation and accumulated
impairment loss—changes in market value other than impairment losses are not recorded. Under the
revaluation method, the carrying amount of a property is increased upward if its market value
increases at balance sheet date. The revaluation gain is credited directly to an equity account
(revaluation reserve) and not via the income statement. However, if a revaluation loss has been
recognized previously, part of the revaluation gain may be recognized in the current year’s income
statement up to the total amount of loss previously recognized in income statement. If market value
decreases on balance sheet date, the revaluation loss is recognized directly in the income statement
unless there is an existing credit balance in the revaluation reserve account. In which case, the loss
should be first offset against the revaluation reserve balance. Under the fair value method,
revaluation gain or loss is recognized directly in the current year’s income statement.

Question 7-19
Impairment in the value of property, plant, and equipment and intangible assets results when
there has been a significant decline in value below carrying value (book value). For property, plant,
and equipment and intangible assets with finite useful lives, IFRS requires an entity to recognize an
impairment loss only when an asset’s recoverable amount is less than its book value. The
recoverable amount of an asset is defined as the higher of the asset’s fair value less costs to sell and

7-4
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

its value in use (which is the present value of the future cash flows expected to be derived from the
use of the asset). The loss recognized is the amount by which the book value exceeds the
recoverable amount of the asset or group of assets (cash-generating unit).
For goodwill, an impairment loss is indicated if the recoverable amount of the cash-generating
unit to which goodwill has been allocated is less than its book value. Any impairment loss is, first,
written off the carrying amount of the goodwill and then, against the assets comprising the cash-
generating unit in proportion to the carrying amount of each asset in the unit.

Question 7-20
Repairs and maintenance are expenditures made to maintain a given level of benefits provided
by the asset and do not increase future benefits. Expenditures for these activities should be
expensed in the period incurred.
Additions involve adding a new major component to an existing asset. These expenditures
usually are capitalized.
Improvements are expenditures for the replacement of a major component of plant and
equipment. The costs of improvements usually are capitalized.
Rearrangements are expenditures to restructure plant and equipment without addition,
replacement, or improvement. The objective is to create a new capability for the asset and not
necessarily to extend useful life. The costs of material rearrangements should be capitalized if they
clearly increase future benefits.

Question 7-21
IFRS allows a company to account for property, plant, and equipment (PP&E) and intangible
assets after initial recognition using either (a) the cost method or (b) the revaluation method. The
revaluation method is applicable to property that is owner-occupied. For property held for
investment purposes (i.e., investment property), a company can use either (a) the cost method or (b)
the fair value method after its initial recognition. If a company chooses the revaluation method or
the fair value method, all assets within a class of PP&E or all investment properties must be
revalued or fair valued on a regular basis. US GAAP prohibits (upward) revaluation of property,
plant, and equipment (PP&E), investment property, and intangible assets after their initial
recognition.

Question 7-22
Under IFRS, an impairment loss for long-lived assets and finite-life intangible assets is
measured as the difference between book value and the recoverable amount. The recoverable
amount is the higher of the asset’s value in use (present value of estimated future cash flows) and
fair value less costs to sell. Under US GAAP, an impairment loss is measured as the difference
between book value and fair value.

Question 7-23
Under IFRS, the measurement of an impairment loss for goodwill is a one-step process that
compares the recoverable amount of the cash-generating unit to which goodwill has been allocated
to the book value of the unit. If the recoverable amount is less, reduce goodwill first, then other

7-5
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

assets. The recoverable amount is the higher of fair value less costs to sell and value in use (present
value of estimated future cash flows).
Under US GAAP, the measurement of an impairment loss for goodwill is a two-step process.
In step 1, we compare the fair value of the reporting unit with its book value. A loss is indicated if
fair value is less than book value. In step 2, we measure the impairment loss as the excess of book
value over implied fair value.

Question 7-24
Under IFRS, litigation costs to successfully defend an intangible right are expensed, except in
rare situations when the expenditure increases future benefits. Under US GAAP, litigation costs to
successfully defend an intangible right are capitalized and amortized over the remaining useful life
of the related intangible.

7-6
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Brief Exercises
Brief Exercise 7-1
Depreciation is a process of cost allocation, not valuation. Koeplin should not
record depreciation expense of $18,000 for year 1 of the machine’s life. Instead, it
should distribute the cost of the asset, less any anticipated residual value, over the
estimated useful life in a systematic and rational manner that attempts to match
revenues with the use of the asset, not the periodic decline in its value.

Brief Exercise 7-2

a. Straight-line:

$30,000 − 2,000
= $7,000 per year
4 years

b. Sum-of-the-years’ digits:

Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10

2023 $28,000 × 4/10 = $11,200

2024 $28,000 × 3/10 = $ 8,400

c. Double-declining balance:

Straight-line rate is 25% (1 ÷ 4 years) × 2 = 50% DDB rate

2023 $30,000 × 50% = $15,000

2024 ($30,000 − 15,000) × 50% = $ 7,500

d. Units-of-production:

$30,000 − 2,000
= $2.80 per unit depreciation rate
10,000 hours

2023 2,200 hours × $2.80 = $6,160

2024 3,000 hours × $2.80 = $8,400

7-7
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Brief Exercise 7-3

a. Straight-line:

$30,000 − 2,000
= $7,000 per year
4 years

2023 $7,000 × 9/12 = $5,250

2024 $7,000 × 12/12 = $7,000

b. Sum-of-the-years’ digits:

Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10

2023 $28,000 × 4/10 × 9/12 = $8,400

2024 $28,000 × 4/10 × 3/12 = $2,800

+$28,000 × 3/10 × 9/12 = 6,300
$9,100

c. Double-declining balance:

Straight-line rate is 25% (1 ÷ 4 years) × 2 = 50% DDB rate

2023 $30,000 × 50% × 9/12 = $11,250

2024 $30,000 × 50% × 3/12 = $ 3,750

+ ($30,000 − 15,000) × 50% ×
9/12 = 5,625
$ 9,375
or,
2024 ($30,000 − 11,250) × 50% = $ 9,375

Brief Exercise 7-4

7-8
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Annual depreciation will equal the group rate multiplied by the depreciable base
of the group:

($425,000 − 40,000) × 18% = $69,300

Since depreciation records are not kept on an individual asset basis, dispositions
are recorded under the assumption that the book value of the disposed item exactly
equals any proceeds received and no gain or loss is recorded. Any actual gain or loss
is implicitly included in the accumulated depreciation account.

Journal entry (not required):

Cash................................................................................ 35,000
Accumulated depreciation (difference) ............................ 7,000
Equipment (account balance).......................................... 42,000

Brief Exercise 7-5

$8,250,000
Depletion per ton = = $2.75 per cubic foot
3,000,000 cubic feet

Year 1 depletion = $2.75 × 700,000 cubic feet = $1,925,000

Year 2 depletion = $2.75 × 800,000 cubic feet = $2,200,000

Brief Exercise 7-6

Expenses for the year include:
Amortization of the patent† = 400,000
Amortization of the developed technology =
*
300,000
Total $700,000

Goodwill is not amortized. In-process research and development is not

amortized.
†
Amortization of the patent:
($4,000,000  5) × 6/12 = $400,000

*Amortization of the developed technology:

($3,000,000  5) × 6/12 = $300,000

7-9
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Brief Exercise 7-7

Calculation of annual depreciation after the estimate change:

$9,000,000 Cost
$320,000 Previous annual depreciation ($8 million ÷ 25 years)
× 2 years 640,000 Depreciation to date (2021 and 2022)
8,360,000 Undepreciated cost
500,000 Revised residual value
7,860,000 Revised depreciable base
 18 Estimated remaining life—18 years (2023–2040)
$ 436,667 2023 depreciation
Brief Exercise 7-8
A change in depreciation method is considered a change in accounting estimate
under IFRS. In other words, a change in the depreciation method reflects a change in
the (a) estimated future benefits from the asset, (b) the pattern of receiving those
benefits, or (c) the company’s knowledge about those benefits, and therefore the two
events should be reported the same way as changes in accounting estimates.
Accordingly, Robotics reports the change prospectively; previous financial statements
are not revised. Instead, the company simply employs the double-declining balance
method from now on. The undepreciated cost remaining at the time of the change
would be depreciated DDB over the remaining useful life.

Asset’s cost $9,000,000

Accumulated depreciation to date* (640,000)
Undepreciated cost, January 1, 2023 $8,360,000
× 2/23 †
Double-declining balance depreciation for 2023 $ 726,957

*$8,000,000 ÷ 25 = $320,000 × 2 years = $640,000

†
Remaining life is 23 years. Twice the straight-line rate is 2/23.
Brief Exercise 7-9
If a material error is discovered in an accounting period subsequent to the period
in which the error is made, previous years’ financial statements that were incorrect as
a result of the error are retrospectively restated to reflect the correction. Any account
balances that are incorrect as a result of the error are corrected by journal entry. If
retained earnings is one of the incorrect accounts, the correction is reported as a prior
period adjustment to the beginning balance in the statement of shareholders’ equity.

7-10
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

In addition, a disclosure note is needed to describe the nature of the error and the
impact of its correction on each affected financial statement line item, and earnings
per share.

In this case, depreciation of $32,000 should have been $320,000 ($8,000,000 

25 years). Therefore, 2021 income before tax is overstated by $288,000 ($320,000 −
32,000) and accumulated depreciation is understated by the same amount. The
following journal entry is needed to record the error correction (ignoring income tax):

Retained earnings............................................................ 288,000

Accumulated depreciation .......................................... 288,000

Depreciation for 2023 would be $320,000.

Brief Exercise 7-10

Because the recoverable amount of division’s assets of $28 million, based on the
higher of net fair value of $21 million and present value of estimated total net future
cash inflow of $28 million, exceeds book value of $26.5 million, there is no
impairment loss.

Brief Exercise 7-11

Because the recoverable amount of division’s assets of $24 million, based on the
higher of net fair value of $21 million and discounted sum of future net cash inflow of
$24 million, is less than book value of $26.5 million, there is an impairment loss. The
impairment loss is calculated as follows:

Book value $26.5 million

Recoverable amount 24.0 million
Impairment loss $ 2.5 million

Brief Exercise 7-12

Under US GAAP, because the undiscounted sum of estimated cash flows of $24
million is less than book value of $26.5 million, there is an impairment loss. The
impairment loss is calculated as follows:

Book value $26.5 million

Fair value 21.0 million

7-11
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Impairment loss $ 5.5 million

Brief Exercise 7-13

Recoverability: Because the book value of EC unit of $43 million (net assets $28
million + goodwill $15 million) exceeds the recoverable amount of $31 million, an
impairment loss is indicated.

Measurement of impairment loss:

Book value (inclusive of goodwill) $43 million
Less: Recoverable amount 31 million
Impairment loss $ 12 million

The goodwill is written down to $3 million (= $15 million − $12 million).

Brief Exercise 7-14

Recoverability: Because the book value of EC unit of $43 million (net assets $28
million + goodwill $15 million) is less than the recoverable amount of $44 million, an
impairment loss is not indicated.

Brief Exercise 7-15

Recoverability: Under US GAAP, because the book value of EC unit of $42
million exceeds the fair value of EC unit of $40 million, an impairment loss is
indicated.

Determination of implied value of goodwill:

Fair value of EC unit $40 million
Less: Fair value of EC unit (excluding goodwill) 31 million
Implied goodwill $ 9 million

Measurement of impairment loss:

Book value of goodwill $15 million
Less: Implied value of goodwill 9 million
Impairment loss $ 6 million

7-12
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Brief Exercise 7-16

The company should account for the factory as property, plant, and
equipment using either (a) the cost method or (b) the revaluation method
after the initial recognition.
Using (a) the cost method:
30/6/23
PPE................................................................................54,000,000
Cash ......................................................................... 54,000,000

31/12/23
Depreciation..................................................................1,040,000
Accumulated depreciation* ..................................... 54,000,000
*($54,000,000 − 2,000,000) ÷ 25 × 6/12 = $1,040,000

30/6/24
Depreciation..................................................................1,040,000
Accumulated depreciation* ..................................... 54,000,000

*($54,000,000 − 2,000,000) ÷ 25 × 6/12 = $1,040,000

30/6/24
Cash...............................................................................59,000,000
Accumulated depreciation*........................................... 2,080,000
PPE .......................................................................... 54,000,000
Gain on disposal (balancing amount) ...................... 7,080,000

Using (b) the revaluation method: 30/6/23

PPE................................................................................54,000,000
Cash ......................................................................... 54,000,000

31/12/23
Depreciation..................................................................1,040,000
Accumulated depreciation* ..................................... 1,040,000

*($54,000,000 − 2,000,000) ÷ 25 × 6/12 = $1,040,000

Adjusting the accumulated depreciation with the elimination method:

31/12/23

7-13
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Accumulated depreciation.............................................1,040,000
PPE .......................................................................... 1,040,000

31/12/23
PPE................................................................................7,040,000
Revaluation reserve (equity)* .................................. 7,040,000

*($60,000,000 − (54,000,000 − 1,040,000))

30/6/24
Depreciation..................................................................1,183,673
Accumulated depreciation* ..................................... 1,183,673
*($60,000,000 − 2,000,000) ÷ 24.5 × 6/12 = $1,183,673

30/6/24
Cash...............................................................................59,000,000
Accumulated depreciation............................................. 1,183,673
PPE .......................................................................... 60,000,000
Gain on disposal (balancing amount) ...................... 183,673

30/6/24
Revaluation reserve (equity)..........................................7,040,000
Retained earnings..................................................... 7,040,000

Adjusting the accumulated depreciation with the proportionate restatement

method:
A − (1 − (1/25 × 6/12)) × A = 60,000,000
A − (1 − 0.02) × A = 60,000,000
Restated cost = A = 60,000,000 ÷ 0.98 = 61,224,489
Restated accumulated depreciation = 1,224,489

31/12/23
PPE*..............................................................................7,224,489
Accumulated depreciation†....................................... 184,489
Revaluation reserve (difference) ...........................
@
7,040,000

*($61,224,489 − 54,000,000)
†
($1,224,489 − 1,040,000)
@
Notice that whether the accumulated depreciation is adjusted using either
the elimination method or the proportionate restatement method, the amount
of revaluation surplus is the same.

7-14
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

30/6/24
Depreciation..................................................................1,183,673
Accumulated depreciation* ..................................... 1,183,673

*($60,000,000 − 2,000,000) ÷ 24.5 × 6/12 = $1,183,673

30/6/24
Cash...............................................................................59,000,000
Accumulated depreciation*........................................... 2,408,162
PPE†.......................................................................... 61,224,489
Gain on disposal (balancing amount) ...................... 183,673

*($1,224,489 + 1,183,673 = 2,408,162)

†
(54,000,000 + 7,224,489 = 61,224,489)

30/6/24
Revaluation reserve (equity)..........................................7,040,000
Retained earnings..................................................... 7,040,000

Brief Exercise 7-17

The company should account for the factory as investment property
using either (a) the cost method or (b) the fair value method after the initial
recognition. If the cost method is used, the answer is the same as part (a) of
BE 7-16.
Using the fair value method:
30/6/23
PPE................................................................................54,000,000
Cash ......................................................................... 54,000,000

No depreciation is recorded under the fair value method.

31/12/23
PPE................................................................................6,000,000
Fair value gain (income statement)* ....................... 6,000,000

7-15
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

*($60,000,000 − 54,000,000)

30/6/24
Cash...............................................................................59,000,000
Loss on disposal (balancing amount)............................ 1,000,000
PPE .......................................................................... 60,000,000

Brief Exercise 7-18

In this case, there is a change in use of the factory from property, plant,
and equipment (owner-occupied) to investment property on June 30, 2024.
Prior to the change in use, the company was using the cost method to
account for the property, plant, and equipment. After the change in use, the
company would be using the fair value method. In this case, IFRS requires
the company to revalue the factory to market value prior to the transfer as if
the revaluation method had been used prior to the transfer.
Up to 30/6/24 prior to the transfer, the factory-related balances under
the cost method (from answer to part (a) of BE 7-16) are as follows:
Balance of PPE = $54,000,000
Balance of accumulated depreciation = $2,080,000

As no depreciation is recorded under the fair value method, we will use

the elimination method to adjust the accumulated depreciation balance for
purpose of revaluing the factory to its market value on 30/6/24. The journal
entries are as follows:
30/6/24
Accumulated depreciation.............................................2,080,000
PPE*..............................................................................7,080,000
Revaluation reserve (equity) .................................... 9,160,000

*($59,000,000 − (54,000,000 − 2,080,000))

Brief Exercise 7-19

Annual maintenance on machinery, $5,400—This is an example of normal
repairs and maintenance. Future benefits are not increased; therefore the
expenditure should be expensed in the period incurred.

Remodeling of offices, $22,000—This is an example of an improvement. The

cost of the remodeling should be capitalized and depreciated, either by (1)

7-16
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

substitution, (2) direct capitalization of the cost, or (3) a reduction of

accumulated depreciation.

Rearrangement of the shipping and receiving area, $35,000—This is an

example of a rearrangement. Because the rearrangement increased productivity,
the cost should be capitalized and depreciated.

Addition of a security system, $25,000—This is an example of an addition. The

cost of the security system should be capitalized and depreciated.

7-17
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercises
1. Straight-line:
Exercise 7-1
$33,000 − 3,000
= $6,000 per year
5 years
2. Sum-of-the-years’ digits:

Depreciable Depreciation
Year Base × Rate per Year = Depreciation
2023 $30,000 $10,000
2024 30,000 8,000
2025 30,000 6,000
2026 30,000 4,000
2027 30,000 2,000
Total $30,000

7-18
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-1 (concluded)

3. Double-declining balance:
Straight-line rate of 20% (1 ÷ 5 years) × 2 = 40% DDB rate.

Book Value Depreciation

Beginning Rate per Book Value
Year of Year × Year = Depreciation End of Year
2023 $33,000 40% $ 13,200 $19,800
2024 19,800 40% 7,920 11,880
2025 11,880 40% 4,752 7,128
2026 7,128 40% 2,851 4,277
2027 4,277 * 1,277 * 3,000
Total $30,000
*Amount necessary to reduce book value to residual value.

4. Units-of-production:

$33,000 − 3,000
= $.30 per mile depreciation rate
100,000 miles

Actual Depreciation Book Value

Miles Rate per End of
Year Driven × Mile = Depreciation Year
2023 22,000 $.30 $6,600 $26,400
2024 24,000 .30 7,200 19,200
2025 15,000 .30 4,500 14,700
2026 20,000 .30 6,000 8,700
2027 21,000 * 5,700 * 3,000
Total 102,000 $30,000

*Amount necessary to reduce book value to residual value.

1. Straight-line:
Exercise 7-2

7-19
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

$115,000 − 5,000
= $11,000 per year
10 years

2. Sum-of-the-years’ digits:

Sum-of-the-digits is ([10 (10 + 1)] ÷ 2) = 55

2023 $110,000 × 10/55 = $20,000

2024 $110,000 × 9/55 = $18,000

3. Double-declining balance:

Straight-line rate is 10% (1 ÷ 10 years) × 2 = 20% DDB rate

2023 $115,000 × 20% = $23,000

2024 ($115,000 − 23,000) × 20% = $18,400

4. One hundred fifty percent declining balance:

Straight-line rate is 10% (1 ÷ 10 years) × 1.5 = 15% rate

2023 $115,000 × 15% = $17,250

2024 ($115,000 − 17,250) × 15% = $14,663

5. Units-of-production:

$115,000 − 5,000
= $.50 per unit depreciation rate
220,000 units

2023 30,000 units × $.50 = $15,000

2024 25,000 units × $.50 = $12,500
Exercise 7-3 1. Straight-line:
$115,000 − 5,000
= $11,000 per year
10 years
2023 $11,000 × 3/12 = $ 2,750
2024 $11,000 × 12/12 = $11,000

7-20
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

2. Sum-of-the-years’ digits:
Sum-of-the-digits is {[10 (10 + 1)]/2} = 55
2023 $110,000 × 10/55 × 3/12 = $ 5,000
2024 $110,000 × 10/55 × 9/12 = $15,000
+ $110,000 × 9/55 × 3/12 = 4,500
$19,500
3. Double-declining balance:
Straight-line rate is 10% (1 ÷ 10 years) × 2 = 20% DDB rate
2023 $115,000 × 20% × 3/12 = $5,750
2024 $115,000 × 20% × 9/12 = $17,250
+ ($115,000 − 23,000) × 20% × 3/12 = 4,600
$21,850
or,
2024 ($115,000 − 5,750) × 20% = $21,850

4. One hundred fifty percent declining balance:

Straight-line rate is 10% (1 ÷ 10 years) × 1.5 = 15% rate
2023 $115,000 × 15% × 3/12 = $ 4,313
2024 $115,000 × 15% × 9/12 = $12,937
+ ($115,000 − 17,250) × 15% × 3/12 = 3,666
$16,603
Or,
2024 ($115,000 − 4,313) × 15% = $16,603

7-21
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-3 (concluded)

5. Units-of-production:

$115,000 − 5,000
= $.50 per unit depreciation rate
220,000 units

2023 10,000 units × $.50 = $ 5,000

2024 25,000 units × $.50 = $12,500

Building depreciation:
Exercise 7-4
$5,000,000 − 200,000
= $160,000 per year
30 years

Building addition depreciation:

Remaining useful life from June 30, 2013 is 27.5 years.

$1,650,000
= $60,000 per year
27.5 years

2023 $60,000 × 6/12 = $30,000

2024 $60,000 × 12/12 = $60,000

Exercise 7-5 Asset A:

Straight-line rate is 20% (1 ÷ 5 years) × 2 = 40% DDB rate
$24,000
= $60,000 = Book value at the beginning of year 2
.40
Cost − (Cost × 40%) = $60,000
.60Cost = $60,000
Cost = $100,000
Asset B:

7-22
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Sum-of-the-years’ digits is 36 {[8 (8 + 1)]÷2}

($40,000 − residual) × 7/36 = $7,000
$280,000 − 7residual
-------------------------- = $7,000
36
$280,000 − 7residual = $252,000
7residual = $28,000
Residual = $4,000
Asset C:
$65,000 − 5,000
= $6,000
Life
Life = 10 years
Asset D:
$230,000 − $10,000 = $220,000 depreciable base
$220,000 ÷ 10 years = $22,000 per year
Method used is straight-line.
Asset E:
Straight-line rate is 12.5% (1 ÷ 8 years) × 1.5 = 18.75% rate
Year 1: $200,000 × 18.75% = $37,500
Year 2: ($200,000 − 37,500) × 18.75% = $30,469
Exercise 7-6Requirement 1

1. Straight-line:

$260,000 − 20,000
= $40,000 per year
6 years

2023 $40,000 × 8/12 = $26,667

2024 $40,000 × 12/12 = $40,000

2. Sum-of-the-years’ digits:

7-23
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Sum-of-the-years’ digits is ([6 (6 + 1)] ÷ 2) = 21

2023 $240,000 × 6/21 × 8/12 = $45,714

2024 $240,000 × 6/21 × 4/12 = $22,857

+$240,000 × 5/21 × 8/12 = 38,095
$60,952

3. Double-declining balance:

1/6 (the straight-line rate) × 2 = 1/3 DDB rate

2023 $260,000 × 1/3 × 8/12 = $57,778

2024 $260,000 × 1/3 × 4/12 = $28,889

+ ($260,000 − 86,667) × 1/3 × 8/12 = 38,518
$67,407
or,
2024 ($260,000 − 57,778) × 1/3 = $67,407

Exercise 7-7Requirement 1

IFRS:

2023: Truck:
$100,000  8 = $12,500 × 6/12 = $6,250

Drill:
$ 20,000  4 = $5,000 × 6/12 = 2,500
Total $8,750

2024: Truck:
$100,000  8 = $12,500

Drill:
$ 20,000  4 = 5,000
Total $17,500

7-24
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 2

US GAAP

2023: $120,000  8 = $15,000 × 6/12 = $7,500

2024: $120,000  8 = $15,000

Exercise 7-8Requirement 1

Depreciation for 2023: $240,000  6 or $40,000 × 9/12 = $30,000

Requirement 2

($ in thousands) Before After

Revaluation Revaluation
Equipment $240 × 220/210 = $251
Accumulated depreciation 30 × 220/210 = 31
Book value $ 210 × 220/210 = $ 220

Equipment ($251,000 − 240,000) 11,000

Accumulated depreciation ($31,000 − 30,000) 1,000
Revaluation surplus—OCI ($220,000 − 210,000) 10,000

Requirement 3

Depreciation for 2024: $220,000  5.25 years = $41,905

Requirement 4

($ in thousands) Before After

Revaluation Revaluation
Equipment $240 × 195/210 = $223
Accumulated depreciation 30 × 195/210 = 28
Book value $ 210 × 195/210 = $195

Revaluation expense ($210,000 − 195,000) 15,000

7-25
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Accumulated depreciation ($28,000 − 30,000) 2,000

Equipment ($223,000 − 240,000) 17,000

Exercise 7-9
Requirement 1

Depreciation
Residual Depreciable Estimated per Year
Asset Cost Value Base Life (yrs.) (straight-line)
Stoves $15,000 $3,000 $12,000 6 $2,000
Refrigerators 10,000 1,000 9,000 5 1,800
Dishwashers 8,000 500 7,500 4 1,875
Total $33,000 $4,500 $28,500 $5,675

$5,675
Group depreciation rate = = 17.2% (rounded)
$33,000

Group life = $28,500

= 5.02 years (rounded)
$5,675
Requirement 2
To record the purchase of new refrigerators.

Refrigerators................................................................... 2,700
Cash............................................................................ 2,700

To record the sale of old refrigerators.

Cash................................................................................ 200
Accumulated depreciation (difference)............................. 1,300
Refrigerators............................................................... 1,500

Exercise 7-10Requirement 1
Cost of the equipment:

7-26
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Purchase price $154,000

Freight charges 2,000
Installation charges 4,000
$160,000

Straight-line rate of 12.5% (1 ÷ 8 years) × 2 = 25% DDB rate.

Book Value
Beginning Depreciation Book Value
Year of Year × Rate per Year = Depreciation End of Year
2023 $160,000 25% $ 40,000 $120,000
2024 120,000 25% 30,000 90,000
2025 90,000 25% 22,500 67,500
2026 67,500 25% 16,875 50,625
2027 50,625 * 5,000 45,625
2028 45,625 * 5,000 40,625
2029 40,625 * 5,000 35,625
2030 35,625 * 5,000 30,625
Total $129,375

*Switch to straight-line in 2027:

Straight-line depreciation:

$50,625 − 30,625
= $5,000 per year
4 years

Requirement 2
For plant and equipment used in the manufacture of a product, depreciation is a
product cost and is included in the cost of inventory. Eventually, when the product is
sold, depreciation will be included in cost of goods sold.
Exercise 7-11Requirement 1
$4,500,000
Depletion per ton = = $5.00 per ton
900,000 tons

2023 depletion = $5.00 × 240,000 tons = $1,200,000

7-27
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 2
Depletion is part of product cost and is included in the cost of the inventory of
coal, just as the depreciation on manufacturing equipment is included in inventory
cost. The depletion is then included in cost of goods sold in the income statement
when the coal is sold.

Exercise 7-12
Timber reserve:

$2,200,000 = $.44 per board foot

5,000,000 board feet

500,000 × $.44 = $220,000 depletion

Land: Not depreciated unless period of ownership is limited.

Logging roads:

$240,000  5,000,000 tons = $.048 per board foot

500,000 × $.048 = $24,000 depreciation

Exercise 7-13Requirement 1
Cost of copper mine:
Mining license $1,000,000
Legal costs 600,000
Restoration costs 303,939 †
$1,903,939
†
$300,000 × 25% = $ 75,000
400,000 × 40% = 160,000
600,000 × 35% = 210,000
$445,000 × .68301* = $303,939
*Present value of $1, n = 4, i = 10% (Table 2)

Amortization:
$1,903,939
Amortization per pound = = $.1904 per pound

7-28
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

10,000,000 pounds

2023 amortization = $.1904 × 1,600,000 pounds = $304,640

2024 amortization = $.1904 × 3,000,000 pounds = $571,200

Depreciation:

$120,000 − 20,000
Depreciation per pound = = $.01 per pound
10,000,000 pounds

2023 depreciation = $.01 × 1,600,000 pounds = $16,000

2024 depreciation = $.01 × 3,000,000 pounds = $30,000
Requirement 2
Amortization of intangible assets and depreciation of tangible assets used in the
extraction of natural resources are part of product cost and are included in the cost of
the inventory of copper, just as the depreciation on manufacturing equipment is
included in inventory cost. The amortization and depreciation are then included in
cost of goods sold in the income statement when the copper is sold.

Exercise 7-14Requirement 1
a. To record the purchase of a patent.

January 1, 2021
Patent.............................................................................. 700,000
Cash............................................................................ 700,000

To record amortization on the patent.

December 31, 2021 and 2022

Amortization expense ($700,000 ÷ 10 years)...................... 70,000
Patent.......................................................................... 70,000

b. To record the purchase of a franchise.

7-29
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

2023
Franchise......................................................................... 500,000
Cash............................................................................ 500,000

c. To record research expenses.

2023
Research expense............................................................ 380,000
Cash............................................................................ 380,000

7-30
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-14 (concluded)

Year-end adjusting entries

Patent: To record amortization on the patent.

December 31, 2023

Amortization expense (determined below)......................... 112,000
Patent.......................................................................... 112,000

Calculation of annual amortization after the estimate change:

($ in thousands)

$700 Cost
$70 Previous annual amortization ($700 ÷ 10 years)
× 2 years 140 Amortization to date (2021–2022)
560 Unamortized cost (balance in the patent account)
÷ 5 Estimated remaining life
$112 New annual amortization

Franchise: To record amortization of franchise.

December 31, 2023

Amortization expense ($500,000 ÷ 10 years)...................... 50,000
Franchise..................................................................... 50,000

Requirement 2

Intangible assets:

Patent $448,000 [1]

Franchise 450,000 [2]
Total intangibles $898,000

[1] $560,000 − 112,000

[2] $500,000 − 50,000

7-31
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-15
To record the purchase of a patent.

January 2, 2023
Patent.............................................................................. 500,000
Cash............................................................................ 500,000

To record amortization of a patent for the year 2023.

Amortization expense ($500,000 ÷ 8 years)........................ 62,500

Patent.......................................................................... 62,500

To record amortization of the patent for the year 2024.

Amortization expense ($500,000 ÷ 8 years)........................ 62,500

Patent.......................................................................... 62,500

To record costs of successfully defending a patent infringement suit.

January 2025
Legal fees........................................................................ 45,000
Cash............................................................................ 45,000

7-32
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-15 (concluded)

To record amortization of patent for the year 2025.

Amortization expense ($500,000 ÷ 8 years)........................ 62,500

Patent.......................................................................... 62,500

Exercise 7-16
($ in millions)
Amortization expense (determined below)......................... 2.5
Patent.......................................................................... 2.5

Calculation of annual amortization after the estimate change:

($ in millions)
$9 Cost
$1 Previous annual amortization ($9 ÷ 9 years)
× 4 years 4 Amortization to date (2019–2022)
5 Unamortized cost (balance in the patent account)
÷ 2 Estimated remaining life (6 years − 4 years)
$2.5 New annual amortization

Exercise 7-17Requirement 1
2023 amortization: $1,200,000 ÷ 10 = $120,000 × 6/12 = $60,000
Requirement 2

Franchise ($1,180,000 − [1,200,000 − 60,000]) 40,000

Revaluation surplus—OCI 40,000

Requirement 3

2024 amortization: $1,180,000 ÷ 9.5 = $124,211

7-33
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 1
Exercise 7-18

Depreciation expense (determined below).......................... 3,088

Accumulated depreciation—computer....................... 3,088

Calculation of annual depreciation after the estimate change:

$40,000 Cost
$7,200 Previous annual depreciation ($36,000 ÷ 5 years)
× 2 years 14,400 Depreciation to date (2021–2022)
25,600 Undepreciated cost
900 Revised residual value
24,700 Revised depreciable base
÷ 8 Estimated remaining life (10 years − 2 years)
$ 3,088 New annual depreciation
Requirement 2

Depreciation expense (determined below).......................... 3,889

Accumulated depreciation—computer....................... 3,889

Calculation of annual depreciation after the estimate change:

$40,000 Cost
Previous depreciation:
$12,000 2021—($36,000 × 5/15)
9,600 2022—($36,000 × 4/15)
21,600 Depreciation to date (2021–2022)
18,400 Undepreciated cost
900 Revised residual value
17,500 Revised depreciable base
× 8/36 Estimated remaining life—8 years
$ 3,889 2023 depreciation
SYD depreciation
Exercise 7-19
[10+9+8 × ($1.5 − .3) million] = $589,091

7-34
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

55

$1,500,000 Cost
589,091 Depreciation to date, SYD (2020–2022)
910,909 Undepreciated cost as of 1/1/23
300,000 Less residual value
610,909 Depreciable base
÷ 7 yrs. Remaining life (10 years − 3 years)
$ 87,273 New annual depreciation

Adjusting entry (2023 depreciation):

Depreciation expense (calculated above)............................ 87,273

Accumulated depreciation.......................................... 87,273

Exercise 7-20Requirement 1
A change in depreciation method is considered a change in accounting estimate. In
other words, a change in the depreciation method reflects a change in the (a)
estimated future benefits from the asset, (b) the pattern of receiving those benefits, or
(c) the company’s knowledge about those benefits. Accordingly, Clinton reports the
change prospectively; previous financial statements are not revised. Instead, the
company simply employs the straight-line method from now on. The undepreciated
cost remaining at the time of the change would be depreciated straight-line over the
remaining useful life.
Requirement 2
Asset’s cost $2,560,000
Accumulated depreciation to date (given) (1,801,000)
Undepreciated cost, January 1, 2023 $ 759,000
Estimated residual value (160,000)
To be depreciated over remaining 3 years $ 599,000
÷ 3 years
Annual straight-line depreciation 2023–2025 $ 199,667 (rounded)

Adjusting entry:
Depreciation expense (calculated above)............ 199,667
Accumulated depreciation .......................... 199,667

7-35
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-21Requirement 1
Analysis:
Correct Incorrect
(Should Have Been Recorded) (As Recorded)

2020 Machine 350,000 Expense 350,000

Cash 350,000 Cash 350,000

2020 Expense 70,000 Depreciation entry omitted

Accum. deprec. 70,000
2021 Expense 70,000 Depreciation entry omitted
Accum. deprec. 70,000

2022 Expense 70,000 Depreciation entry omitted

Accum. deprec. 70,000

During the three-year period, depreciation expense was understated by

$210,000, but other expenses were overstated by $350,000, so net income
during the period was understated by $140,000, which means retained
earnings is currently understated by that amount.

During the three-year period, accumulated depreciation was understated and

continues to be understated by $210,000.

To correct incorrect accounts

Machine .............................................................. 350,000
Accumulated depreciation ($70,000 × 3 years)... 210,000
Retained earnings ($350,000 − 210,000)............. 140,000
Requirement 2
Correcting entry:

Assuming that the machine had been disposed of, no correcting entry would be
required because, after five years, the accounts would show appropriate
balances.

7-36
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 1
Exercise 7-22
IFRS requires an impairment loss to be recognized when an asset’s book value
exceeds the higher of the asset’s value-in-use (present value of estimated future cash
flows) and fair value less costs to sell. In this case, value-in-use and fair value less
costs to sell are the same, $3.5 million. Because book value ($6.5 million) exceeds
this amount, a loss is indicated. The loss is the difference between book value and the
recoverable amount, which also is the higher of the asset’s value-in-use (present value
of estimated future cash flows) and fair value less costs to sell. Therefore, the amount
of impairment loss is the same as under US GAAP, $3 million.

Book value $6.5 million

Fair value 3.5 million
Impairment loss 3.0 million

Requirement 2
An impairment loss also is indicated because book value ($6.5 million) exceeds
fair value less costs to sell/value-in-use ($5 million). The amount of impairment loss
is $1.5 million.

Book value $6.5 million

Fair value 5.0 million
Impairment loss 1.5 million

Exercise 7-23Requirement 1
Under US GAAP, because the undiscounted sum of future cash flows of $4
million is less than book value of $6.5 million, there is an impairment loss:
Book value $6.5 million
Fair value 3.5 million
Impairment loss 3.0 million

Requirement 2
Because the undiscounted sum of future cash flows of $6.8 million exceeds book
value of $6.5 million, there is no impairment loss.

7-37
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-24Requirement 1
An impairment loss is indicated because the recoverable amount of $15 million
(higher of value in use of $15 million and fair value less costs to sell of $11 million)
is less than the book value of $18.3 million.

The amount of the loss to be reported is calculated as follows:

Book value $18,300,000

Recoverable amount 15,000,000
Impairment loss $ 3,300,000
Requirement 2
The loss would appear in the income statement along with other operating
expenses.
Requirement 3

Loss on impairment ............................................ 3,300,000

Accumulated impairment loss......................... 3,300,000

Requirement 4
An impairment loss is indicated because the recoverable amount of $11 million
(higher of value in use of $10 million and fair value less costs to sell of $11 million)
is less than the book value of $18.3 million.

The amount of the loss to be reported is calculated as follows:

Book value $18,300,000

Recoverable amount 11,000,000
Impairment loss $ 7,300,000
Requirement 5
Because the recoverable amount of $19 million (higher of value in use of $19
million and fair value less costs to sell of $11 million) exceeds the book value of
$18.3 million, no impairment loss is indicated.

7-38
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-25
Requirement 1
Determination of Centerpoint’s carrying amount:
Book value of Centerpoint’s net assets $220 million
Book value of goodwill 50 million
Book value of Centerpoint $ 270 million

Measurement of impairment loss:

Book value of Centerpoint $270 million
Recoverable amount of Centerpoint 250 million
Impairment loss $20 million
Requirement 2
Because the recoverable amount of Centerpoint of $270 million is equal to its
book value of $270 million, there is no impairment loss.

Exercise 7-26
Requirement 1
Determination of implied goodwill:
Fair value of Centerpoint $220 million
Fair value of Centerpoint’s net assets (excluding goodwill) 200 million
Implied value of goodwill $ 20 million

Measurement of impairment loss:

Book value of goodwill $50 million
Implied value of goodwill 20 million
Impairment loss $30 million
Requirement 2
Because the fair value of the reporting unit, $270 million, exceeds book value,
$250 million, there is no impairment loss.

7-39
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-27
Requirement 1

Calculation of goodwill:

Consideration exchanged $420 million

Less fair value of net assets:
Assets $512 million
Less: Liabilities assumed (150) million (362) million
Goodwill $ 58 million
Requirement 2

Determination of Harman’s book value:

Book value of goodwill $58 million
Book value of Harman’s net assets 410 million
Book value of Harman $468 million

Measurement of impairment loss:

Book value of Harman $468 million
Recoverable amount of Harman 370 million
Impairment loss $ 98 million
Requirement 3

Entry to record the impairment loss:

($ in millions)
Impairment loss .................................................. 98
Goodwill ......................................................... 58
Harman’s net assets ………………………… 40

Exercise 7-28Requirement 1

Cost method:

7-40
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Purchase cost $2,000,000 Summary of balances and

Less: Residual value (100,000) charges:
Depreciable base 1,900,000
2023 Depreciation (20 years) 31 December
$95,000 31 December
2023 2024
Building
Cost as of 1/7/2022 2,000,000
2,000,000 2,038,000
Accumulated depreciation
Less: Accumulated depreciation 95,000
(95,000) 197,000
Carrying amount 30/6/2023 1,905,000
2023 2024
Depreciation
Cost expense
as of 1/7/2022 95,000
2,000,000 102,000
Carpark cost 38,000
Less: Residual value (100,000)
Depreciable base 1,938,000
2024 Depreciation (19 years) $102,000

Cost as of 1/7/2023 2,038,000

Less: Accumulated depreciation (197,000)
Carrying amount 30/6/2024 1,841,000

7-41
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 2
(a) Revaluation method with direct write-off of accumulated depreciation:

Purchase cost $2,000,000

Less: Residual value (100,000) Summary of balances
Depreciable base 1,900,000 and charges:
2023 Depreciation (20 years) $95,000
31 December 31 December
Cost as of 1/7/2022 2023
2,000,000 2024
Building
Less: Accumulated depreciation 2,200,000
(95,000) 2,500,000
Accumulated depreciation
Cost less accum. depr. 30/6/2023 -
1,905,000 -
Revaluation reserve (equity)
Add: Revaluation surplus (OCI) 295,000
295,000 669,526
Carrying amount 30/6/2023 2,200,000
2013 2014
Depreciation expense 95,000 112,526
Carrying amount as of 1/7/2023 2,200,000
Revaluation surplus (OCI) 295,000 612,526
Carpark cost 38,000
Less: Residual value (100,000)
Depreciable base
(b) Revaluation 2,138,000
2024 Depreciation (19 years) $112,526 depreciation:

Carrying amount as of 1/7/2023 2,238,000

Less: Accumulated depreciation (112,526)
Cost less accum. depr. 30/6/2023 2,125,474
Add: Revaluation surplus OCI) 374,526
Carrying amount 30/6/2024 2,500,000

7-42
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

(1)Purchase cost $2,000,000 X

Less: Residual value (100,000)
Depreciable base 1,900,000
2023 Depreciation (20 years) $95,000
Restated (1)
Cost as of 1/7/2022 2,000,000 309,711 2,309,711
Less: Accumulated depreciation (95,000) (14,711) (109,711)
Cost less accum. depr. 30/6/2023 1,905,000 2,200,000
Add: Revaluation surplus (OCI) 295,000 295,000
Carrying amount 30/6/2023 2,200,000

Carrying amount as of 1/7/2023 2,200,000

Carpark cost 38,000
Less: Residual value (100,000)
Depreciable base 2,138,000
2024 Depreciation (19 years) $112,526
Restated (2)
Carrying amount as of 1/7/2023 2,347,711 413,805 2,761,516
Less: Accumulated depreciation (222,237) (39,279) (261,516)
Cost less accum. depr. 30/6/2023 2,125,474 2,500,000
Add: Revaluation surplus (OCI) 374,526 374,526
Carrying amount 30/6/2024 2,500,000
− 95/2000 * X = 2,200,000 => 0.9525X = 2,200,000 => X = 2,309,711 and
0.0475X = 109,711
(2) X − 222,237/2,3470711 * X = 2,500,000 => 0.9053X = 2,500,000 => X =
2,761,516 and 0.0947X = 261,516
Summary of balances and charges:

31 December 31 December
2023 2024
Building 2,309,711 2,761,516
Accumulated depreciation (109,711) (261,516)
Revaluation reserve (equity) 295,000 669,526

2013 2014
Depreciation expense 95,000 112,526
Revaluation surplus (OCI) 295,000 374,526

7-43
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-29
Requirement 1

The accounting treatment of a change in use of property from PPE to

investment property (IP) depends on the accounting method used to account for the
IP after the change in use.
If the cost method is used to account for the IP, the carrying amount of the PPE
(under either the cost method or the revaluation) on the date of change in use will be
deemed to be the cost of the IP.
On the other hand, if the fair value method is used to account for the IP and the
PPE is accounted for using the cost method, the property would need to be revalued
to fair value prior to the change in use as if the revaluation method had always been
used to account for the PPE. The revalued amount of the PPE would become the
carrying amount of the IP on the date of change in use. The balance in the
revaluation reserve, if any, is transferred directly to retained earnings only when the
IP is disposed of subsequently. If the revaluation method was used to account for the
PPE, a revaluation would be carried out on the date of change in use prior to
transferring it to IP.

7-44
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 2

7-45
 From the requirement 1 answer to E7-29 above, the cost of the building on June
30, 2024, is $2,038,000 and the balance in the accumulated depreciation is $197,000.
The
Chapter journalPlant
7: Property, entry to revalue
and Equipment, the building
Investment to Intangible
Property, and its fair Assets:
valueUtilization
on June and30, 2024, is as
Impairment
follows:
Dr Building (PPE) 462,000
Dr Accumulated depreciation 197,000
Cr Revaluation reserve 659,000

Dr Building (IP) 2,500,000

Cr Building (PPE) 2,500,000

The journal entry to fair value the building on June 30, 2025, is as follows:
Dr Building (IP) 500,000
Cr Fair value gain (P/L) 500,000

The journal entry to record the sale of the building on June 30, 2025, is as follows:
Dr Cash 2,800,000
Dr Loss on disposal 200,000
Cr Building (IP) 3,000,000

Dr Revaluation reserve 659,000

Cr Retained earnings 659,000

Exercise 7-30
1. The market value of the building was estimated at $1.9 million and $1.5 million on
June 30, 2023 and 2024, respectively.
Purchase cost $2,000,000
Less: Residual value (100,000)
Depreciable base 1,900,000
2023 Depreciation (20 years) $95,000

Cost as of 1/7/2022 2,000,000

Less: Accumulated depreciation (95,000)
Cost less accum. depr. 30/6/2023 1,905,000
Add: Revaluation loss (P/L) (5,000)
Carrying amount 30/6/2023 1,900,000

The journal entry to revalue the building to its fair value on June 30, 2023, is as
follows:
Dr Depreciation 95,000
Cr Accumulated depreciation 95,000

Dr Accumulated depreciation 95,000

Dr Revaluation loss (P/L) 5,000
Cr Building (PPE) 100,000
7-46

Carrying amount as of 1/7/2023 1,900,000

Carpark cost 38,000
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

The journal entry to revalue the building to its fair value on June 30, 2023, is as
follows:
Dr Depreciation 95,000
Cr Accumulated depreciation 95,000

Dr Accumulated depreciation 95,000

Dr Building (PPE) 200,000
Cr Revaluation reserve (OCI) 295,000

Carrying amount as of 1/7/2023 2,200,000

Carpark cost 38,000
Less: Residual value (100,000)
Depreciable base 2,138,000
2024 Depreciation (19 years) $112,526

Carrying amount as of 1/7/2023 2,238,000

Less: Accumulated depreciation (112,526)
Cost less accum. depr. 30/6/2023 2,125,474
Add: Revaluation loss (OCI) (225,474)
Carrying amount 30/6/2024 1,900,000

The journal entry to revalue the building to its fair value on June 30, 2024, is as
follows:
Dr Depreciation 112,526
Cr Accumulated depreciation 112,526

Dr Accumulated depreciation 112,526

Dr Revaluation reserve (OCI) 225,474
Cr Building (PPE) 338,000
3. The market value of the building was estimated at $1.9 million and $2.2 million on
June 30, 2023 and 2024, respectively.
Purchase cost $2,000,000
Less: Residual value (100,000)
Depreciable base 1,900,000
2023 Depreciation (20 years) $95,000

Cost as of 1/7/2022 2,000,000

Less: Accumulated depreciation (95,000)
Cost less accum. depr. 30/6/2023 1,905,000
Add: Revaluation loss (P/L) (5,000)
Carrying amount 30/6/2023 1,900,000
7-47
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

The journal entry to revalue the building to its fair value on June 30, 2023, is as
follows:
Dr Depreciation 95,000
Cr Accumulated depreciation 95,000

Dr Accumulated depreciation 95,000

Dr Revaluation loss (P/L) 5,000
Cr Building (PPE) 100,000

Carrying amount as of 1/7/2023 1,900,000

Carpark cost 38,000
Less: Residual value (100,000)
Depreciable base 1,838,000
2024 Depreciation (19 years) $96,737

Carrying amount as of 1/7/2023 1,938,000

Less: Accumulated depreciation (96,737)
Cost less accum. depr. 30/6/2023 1,841,263
Add: Revaluation gain 358,737
Carrying amount 30/6/2024 2,200,000

The journal entry to revalue the building to its fair value on June 30, 2024, is as
follows:
Dr Depreciation 96,737
Cr Accumulated depreciation 96,737

Dr Accumulated depreciation 96,737

Dr Building (PPE) 262,000
Cr Revaluation gain (P/L) 5,000
Cr Revaluation reserve (OCI) 353,737

Exercise 7-31
Requirement 1

The IFRS guidance on accounting for the impairment of long-lived assets is

found in IAS No. 36 Impairment of Assets.
Requirement 2

7-48
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

The specific IFRS citation that discusses the disclosures required in the notes to
the financial statements for the impairment of long-lived assets classified as held and
used is IAS No. 36 Impairment of Assets paragraph 126.

Requirement 3

Per IAS No. 36 Impairment of Assets paragraph 126, the following is disclosed for
each class of assets:

 The amount of impairment losses recognized in profit or loss during the period and
the line item(s) of the statement of comprehensive income in which those
impairment losses are included.
 The amount of impairment losses on revalued assets recognized in other
comprehensive income during the period.

Per IAS No. 36 Impairment of Assets paragraph 130, the following is disclosed for
each material impairment loss recognized during the period for an individual asset,
including goodwill, or a cash-generating unit:
(a) The events and circumstances that led to the recognition of the impairment loss.
(b) The amount of the impairment loss recognized.
(c) For an individual asset:
(i) the nature of the asset; and
(ii) if the entity reports segment information in accordance with IFRS 8, the
reportable segment to which the asset belongs.
(d) For a cash-generating unit:
(i) a description of the cash-generating unit (such as whether it is a product
line, a plant, a business operation, a geographical area, or a reportable
segment as defined in IFRS 8);
(ii) the amount of the impairment loss recognized by class of assets and, if the
entity reports segment information in accordance with IFRS 8, by
reportable segment; and
(iii)if the aggregation of assets for identifying the cash-generating unit has
changed since the previous estimate of the cash-generating unit’s
recoverable amount (if any), a description of the current and former way of
aggregating assets and the reasons for changing the way the cash-
generating unit is identified.
(e) whether the recoverable amount of the asset (cash-generating unit) is its fair
value less costs to sell or its value in use.

7-49
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

(f) if recoverable amount is fair value less costs to sell, the basis used to determine
fair value less costs to sell (such as whether fair value was determined by
reference to an active market).
(g) if recoverable amount is value in use, the discount rate(s) used in the current
estimate and previous estimate (if any) of value in use.

Exercise 7-32
The IASB is the independent standard setting body of the IFRS Foundation, which
represents the single source of authoritative IASs, IFRSs, SICs, and IFRICs. The
specific citation for each of the following items is:

1. Depreciation involves a systematic and rational allocation of cost rather than

a process of valuation:
Specifically, IAS No. 16 Property, Plant and Equipment states the following
 Paragraph 60:
“The depreciation method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity.”
 Paragraph 52:
“Depreciation is recognized even if the fair value of the asset exceeds its
carrying amount, as long as the asset’s residual value does not exceed its
carrying amount. Repair and maintenance of an asset do not negate the need to
depreciate it.”

Paragraph 60 suggests that depreciation is a systematic and rational allocation of

cost (less residual value) over the useful life of an asset to match the benefits
that accrue from its usage.

Paragraph 52 lends further support that depreciation is not a valuation process as

depreciation needs to be recorded for an asset even when its fair value exceeds
its carrying amount. Depreciation is to be recognized so long as the asset is
used and benefits are accruing from its usage.

2. The calculation of an impairment loss for property, plant, and equipment:

IAS No. 36 Impairment of Assets paragraph 59 states that “if, and only if, the

7-50
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

recoverable amount of an asset is less than its carrying amount, the carrying amount
of the asset shall be reduced to its recoverable amount. That reduction is an
impairment loss.”

Paragraph 6 states that the “recoverable amount of an asset or a cash-generating unit

is the higher of its fair value less costs to sell and its value in use.”

7-51
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-32 (concluded)

3. Accounting for a change in depreciation method:

IAS No. 16 Property, Plant and Equipment paragraph 61 states that “The
depreciation method applied to an asset shall be reviewed at least at each financial
year-end and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method
shall be changed to reflect the changed pattern. Such a change shall be accounted
for as a change in an accounting estimate in accordance with IAS 8.”

4. Goodwill should not be amortized:

Surprisingly, there is no provision in IFRS that explicitly states that goodwill

should not be amortized. However, this can be inferred from IFRS No. 3 Business
Combinations paragraph B69(d), which states that “Subsequent accounting for
goodwill—From the beginning of the first annual period in which this IFRS is
applied, an entity shall discontinue amortizing goodwill arising from the prior
business combination and shall test goodwill for impairment in accordance with
IAS 36.”

1. To record the replacement of the heating system.

Exercise 7-33

Accumulated depreciation—building............................. 250,000

Cash............................................................................ 250,000

2. To record the addition to the building.

Building.......................................................................... 750,000
Cash............................................................................ 750,000

3. To expense annual maintenance costs.

7-52
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Maintenance expense...................................................... 14,000

Cash............................................................................ 14,000

4. To capitalize rearrangement costs.

Machinery....................................................................... 50,000
Cash............................................................................ 50,000

Exercise 7-34Requirement 1
2021 amortization: $6,000,000  10 = $600,000 × 3/12 = $150,000
2022 amortization: $6,000,000  10 = $600,000

Requirement 2

Litigation expense 500,000

Cash 500,000

Requirement 3

2023 amortization: $6,000,000  10 = $600,000

Requirement 4

Requirement 2:

Patent 500,000
Cash 500,000

Requirement 3:

Calculation of revised annual amortization:

$6,000,000 Cost

7-53
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

750,000 Amortization to date (above)

5,250,000 Unamortized cost (balance in the patent account)
500,000 Add
5,750,000 New unamortized cost
÷ 8 3/4 Estimated remaining life (10 years − 1 1/4 years)
$ 657,143 New annual amortization

Exercise 7-35Requirement 1

Cash................................................................................ 17,000
Accumulated depreciation—lathe (determined below)....... 56,250
Loss on sale (difference)................................................... 6,750
Lathe (balance).............................................................. 80,000

Accumulated depreciation:

$80,000 − 5,000
Annual depreciation = = $15,000
5 years

2019 $15,000 × 1/2 = $ 7,500

2020 15,000
2021 15,000
2022 15,000
2023 $15,000 × 1/4 = 3,750
Total $56,250

7-54
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-35 (concluded)

Requirement 2

Cash................................................................................ 17,000
Accumulated depreciation—lathe (determined below)....... 67,500
Gain on sale (difference)............................................... 4,500
Lathe (balance).............................................................. 80,000

Accumulated depreciation:

Sum-of-the-digits is ([5 (5 + 1)]/2) = 15

2019 $75,000 × 5/15 × 6/12 = $12,500

2020 $75,000 × 5/15 × 6/12 = $12,500

+ $75,000 × 4/15 × 6/12 = 10,000 22,500

2021 $75,000 × 4/15 × 6/12 = $10,000

+ $75,000 × 3/15 × 6/12 = 7,500 17,500

2022 $75,000 × 3/15 × 6/12 = $ 7,500

+ $75,000 × 2/15 × 6/12 = 5,000 12,500

2023 $75,000 × 2/15 × 3/12 = 2,500

Total $67,500

Exercise 7-36

7-55
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

List A List B
g 1. Depreciation a. Cost allocation for natural resource.
d 2. Service life b. Accounted for prospectively.
f 3. Depreciable base c. When there has been a significant
decline in value.
e 4. Activity-based method d. The amount of use expected from
plant and equipment and finite-life
intangible assets.
m 5. Time-based method e. Estimates service life in units of output.
h 6. Double-declining balance f. Cost less residual value.
j 7. Group method g. Cost allocation for plant and equipment.
k 8. Composite method h. Does not subtract residual value from cost.
a 9. Depletion i. Accounted for the same way as a change in
estimate.
l 10. Amortization j. Aggregates assets that are similar.
b 11. Change in useful life k. Aggregates assets that are physically
unified.
i 12. Change in depreciation l. Cost allocation for an intangible asset.
method
c 13. Write-down of asset m. Estimates service life in years.

Exercise 7-37Requirement 1
To record the acquisition of small tools.

2021
Small tools ..................................................................... 8,000
Cash............................................................................ 8,000

To record additional small tool acquisitions.

2023
Small tools...................................................................... 2,500
Cash............................................................................ 2,500

7-56
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

To record the sale/depreciation of small tools.

2023
Cash ............................................................................... 250
Depreciation expense (difference)..................................... 1,750
Small tools.................................................................. 2,000

7-57
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Exercise 7-37 (concluded)

Requirement 2
To record the acquisition of small tools.

2021
Small tools ..................................................................... 8,000
Cash............................................................................ 8,000

To record the replacement/depreciation of small tools.

2023
Depreciation expense ..................................................... 2,500
Cash............................................................................ 2,500

To record the sale of small tools.

2023
Cash ............................................................................... 250
Depreciation expense.................................................. 250

Problems
Problem 7-1
Requirement 1
Determine useful life:
$200,000 depreciable base
= 20-year useful life
$10,000 annual depreciation
Determine age of assets:
$40,000 accumulated depreciation
= 4 years old
$10,000 annual depreciation
Double-declining balance in fourth year of life:

7-58
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Year 1 (2020) $200,000 × 10% = $20,000

Year 2 (2021) 180,000 × 10% = 18,000
Year 3 (2022) 162,000 × 10% = 16,200
Year 4 (2023) 145,800 × 10% = 14,580
Requirement 2

Depreciation expense (below) ....................... 20,000

Accumulated depreciation ..................... 20,000

$200,000 Cost
30,000 Depreciation to date, SL 3 years (2020–2022)
$170,000 Undepreciated cost as of 1/1/23

Seventeen-year remaining life, or 1/17 × 2 × $170,000 = 2/17 × $170,000 =

$20,000

Problem 7-2Requirement 1
Cord Company
ANALYSIS OF CHANGES IN PLANT ASSETS
for the Year Ending December 31, 2023

Balance Balance
12/31/22 Increase Decrease 12/31/23
Land $ 175,000 $ 312,500 [1] $ -- $ 487,500
Land improvements -- 192,000 -- 192,000
Buildings 1,500,000 937,500 [1] -- 2,437,500
Machinery and equipment 1,125,000 385,000 [2] 17,000 1,493,000
Automobiles and trucks 172,000 12,500 24,000 160,500
Leasehold improvements 216,000 -- -- 216,000
$3,188,000 $1,839,500 $41,000 $4,986,500

Explanations of Amounts:

[1] Plant facility acquired from King 1/6/23—allocation to Land and Building:
Fair value—25,000 shares of Cord common
share at $50 per share fair value $1,250,000

Allocation in proportion to appraised values at date of exchange:

% of

7-59
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Amount Total
Land $187,500 25
Building 562,500 75
$750,000 100

Land $1,250,000 × 25% = $ 312,500

Building $1,250,000 × 75% = 937,500
$1,250,000

[2] Machinery and equipment purchased 7/1/23:

Invoice cost $325,000
Delivery cost 10,000
Installation cost 50,000
Total acquisition cost $385,000

7-60
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-2 (continued)

Requirement 2
Cord Company
DEPRECIATION AND AMORTIZATION EXPENSE
for the Year Ended December 31, 2023
Land Improvements:
Cost $192,000
Straight-line rate (1 ÷ 12 years) × 8 1/3%
Annual depreciation 16,000
Depreciation on land improvements for 2023:
(3/25 to 12/31/23) × 3/4 $ 12,000
Buildings:
Book value, 1/1/23 ($1,500,000 − 328,900) $1,171,100
Building acquired 1/6/23 937,500
Total amount subject to depreciation 2,108,600
150% declining balance rate:
(1 ÷ 25 years = 4% × 1.5) × 6% 126,516
Machinery and equipment:
Balance, 1/1/23 $1,125,000
Straight-line rate (1 ÷ 10 years) × 10% 112,500
Purchased on 7/1/23 385,000
Depreciation for one-half year × 5% 19,250
Depreciation on machinery and equipment for 2023 131,750
Automobiles and trucks:
Book value, 1/1/23 ($172,000 − 100,325) $71,675
Deduct 1/1/23 book value of truck sold
on 9/30 ($9,100 + 2,650) (11,750)
Amount subject to depreciation 59,925
150% declining balance rate:
(1 ÷ 5 years = 20% × 1.5) × 30% 17,978
Automobile purchased 8/30/23 12,500
Depreciation for 2023 (30% × 4/12) × 10% 1,250
Truck sold on 9/30/23—depreciation (given) 2,650
Depreciation on automobiles and trucks 21,878

7-61
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-2 (concluded)

Leasehold improvements:
Book value, 1/1/23 ($216,000 − 108,000) $108,000
Amortization period (1/1/23 to 12/31/27) ÷ 5 years
Amortization of leasehold improvements for 2023 21,600
Total depreciation and amortization expense for 2023 $313,744

Problem 7-3
Pell Corporation
DEPRECIATION EXPENSE
for the Year Ended December 31, 2023

Land improvements:
Cost $ 180,000
Straight-line rate (1 ÷ 15 years) × 6 2/3% $ 12,000

Building:
Book value 12/31/22 ($1,500,000 − 350,000) $1,150,000
150% declining balance rate:
(1 ÷ 20 years = 5% × 1.5) × 7.5% 86,250

Machinery and Equipment:

Balance, 12/31/22 $1,158,000
Deduct machine sold (58,000) $1,100,000
Straight-line rate (1 ÷ 10 years) × 10% 110,000

Purchased 1/2/23 287,000

Depreciation × 10% 28,700

Machine sold 3/31/23 58,000

Depreciation for three months × 2.5% 1,450
Total depreciation on machinery and equipment 140,150

Automobiles:
Book value on 12/31/22 ($150,000 − 112,000) $38,000
150% declining balance rate:
(1 ÷ 3 years = 33.333% × 1.5) × 50% 19,000
Total depreciation expense for 2023 $257,400
1. Depreciation for 2021 and 2022.
Problem 7-4

7-62
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

December 31, 2021

Depreciation expense ($48,000 ÷ 8 years × 9/12)................. 4,500
Accumulated depreciation—equipment...................... 4,500

December 31, 2022

Depreciation expense ($48,000 ÷ 8 years).......................... 6,000
Accumulated depreciation—equipment...................... 6,000

2. The year 2023 expenditure.

January 4, 2023
Repair and maintenance expense.................................... 2,000
Equipment....................................................................... 10,350
Cash............................................................................ 12,350

3. Depreciation for the year 2023.

December 31, 2023

Depreciation expense (determined below).......................... 5,800
Accumulated depreciation—equipment...................... 5,800

Calculation of annual depreciation after the estimate change:

$ 48,000 Cost
10,500 Depreciation to date ($4,500 + 6,000)
37,500 Undepreciated cost
10,350 Asset addition
47,850 New depreciable base
÷ 8 1/4 Estimated remaining life (10 years − 1 3/4 years)
$ 5,800 New annual depreciation

7-63
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-5
(1) $65,000
Allocation in proportion to appraised values at date of exchange:
% of
Amount Total
Land $72,000 8
Building 828,000 92
$900,000 100
Land $812,500 × 8% = $ 65,000
Building $812,500 × 92% = 747,500
$812,500
(2) $747,500
(3) 50 years $747,500 − 47,500

$14,000 annual depreciation

(4) $ 14,000 Same as prior year, since method used is straight-line.
(5) $ 85,400 3,000 shares × $25 per share = $75,000
Plus demolition of old building 10,400
$85,400
(6) None No depreciation before use.
(7) $ 16,000 Fair value.
(8) $ 2,400 $16,000 × 15% (1.5 × Straight-line rate of 10%).
(9) $ 2,040 ($16,000 − 2,400) × 15%.
(10) $ 99,000 Total cost of $110,000 − $11,000 in normal repairs.
(11) $ 17,000 ($99,000 − 5,500) × 10/55.
(12) $ 5,100 ($99,000 − 5,500) × 9/55 × 4/12.
(13) $ 30,840 PVAD = $4,000 (7.71008*)
*Present value of an annuity due of $1: n = 11, i = 8% (from present value
table)
(14) $ 2,056 $30,840

15 years

7-64
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-6
Requirement 1
Building:

$500,000
= $20,000 per year × 9/12 = $15,000
25 years

Machinery:

$240,000 − (10% × $240,000)

= $27,000 per year × 9/12 = $20,250
8 years

Equipment:

Sum-of-the-digits is ([6 (6 + 1)]÷2) = 21

($160,000 − 13,000) × 6/21 = $42,000 × 9/12 = $31,500

Requirement 2

(1)

June 29, 2024

Depreciation expense (determined below).......................... 5,625
Accumulated depreciation—machinery...................... 5,625

$100,000 − (10% × $100,000)

= $11,250 × 6/12 = $5,625
8 years

7-65
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-6 (concluded)

(2)

June 29, 2024

Cash................................................................................ 80,000
Accumulated depreciation—machinery (below).............. 14,063
Loss on sale of machinery (difference)............................. 5,937
Machinery................................................................... 100,000

Accumulated depreciation on machinery sold:

2023 depreciation = $11,250 × 9/12 = $ 8,438

2024 depreciation = $11,250 × 6/12 5,625
Total $14,063
Requirement 3
Building:

$500,000
= $20,000
25 years

Machinery:

$140,000 − (10% × $140,000)

= $15,750
8 years

Equipment:

($160,000 − 13,000) × 6/21 = $42,000 × 3/12 = $10,500

+ ($160,000 − 13,000) × 5/21 = $35,000 × 9/12 = 26,250
$36,750

Problem 7-7Requirement 1
Cost of mineral mine:
Purchase price $1,600,000
Development costs 600,000

7-66
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

$2,200,000
Depletion:

$2,200,000 − 100,000
Depletion per ton = = $5.25 per ton
400,000 tons

2023 depletion = $5.25 × 50,000 tons = $262,500

2024 depletion:
Revised depletion rate = ($2,200,000 − 262,500) − 100,000
= $4.20
487,500 − 50,000 tons

2024 depletion = $4.20 × 80,000 tons = $336,000

Depreciation:

Structures:
$150,000
Depreciation per ton = = $.375 per ton
400,000 tons

2023 depreciation = $.375 × 50,000 tons = $18,750

2024 depreciation:
Revised depreciation rate = $150,000 − 18,750
= $.30
487,500 − 50,000 tons

2024 depreciation = $.30 × 80,000 tons = $24,000

7-67
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-7 (continued)

Equipment:
$80,000 − 4,000
Depreciation per ton = = $.19 per ton
400,000 tons

2023 depreciation = $.19 × 50,000 tons = $9,500

2024 depreciation:
Revised depreciation rate = ($80,000 − 9,500) − 4,000
= $.152
487,500 − 50,000 tons
2024 depreciation = $.152 × 80,000 tons = $12,160
Requirement 2
Mineral mine:
Cost $ 2,200,000
Less accumulated depletion:
2023 depletion $262,500
2024 depletion 336,000 598,500
Book value, 12/31/24 $1,601,500

Structures:
Cost $ 150,000
Less accumulated depreciation:
2023 depreciation $18,750
2024 depreciation 24,000 42,750
Book value, 12/31/24 $107,250

Equipment:
Cost $ 80,000
Less accumulated depreciation:
2023 depreciation $ 9,500
2024 depreciation 12,160 21,660
Book value, 12/31/24 $58,340

7-68
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-7 (concluded)

Requirement 3
Depletion of natural resources and depreciation of assets used in the extraction of
natural resources are part of product cost and are included in the cost of the inventory
of the mineral, just as the depreciation on manufacturing equipment is included in
inventory cost. The depletion and depreciation are then included in cost of goods sold
in the income statement when the mineral is sold.
In 2023, since all of the ore was sold, all of 2023’s depletion and depreciation is
included in cost of goods sold. In 2024, since not all of the extracted ore was sold, a
portion of both 2024’s depletion and depreciation remains in inventory.

Problem 7-8Requirement 1
Calculation of goodwill:

Consideration exchanged $2,000,000

Less: Fair value of net identifiable assets 1,700,000
$ 300,000

The cost of goodwill is not amortized.

To record amortization of patent.

Amortization ($80,000 ÷ 8 years × 6/12).............................. 5,000

Patent.......................................................................... 5,000

To record amortization of franchise.

Amortization expense ($200,000 ÷ 10 years × 3/12)............. 5,000

Franchise..................................................................... 5,000

7-69
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-8 (concluded)

Requirement 2
Intangible assets:

Goodwill $300,000 [1]

Patent 75,000 [2]
Franchise 195,000 [3]
Total intangibles $570,000

[1] $300,000
[2] $ 80,000 − 5,000
[3] $200,000 − 5,000

Problem 7-9Requirement 1
Machine 101:

$70,000 − 7,000
= $6,300 per year × 3 years = $ 18,900
10 years
Machine 102:
$80,000 − 8,000
= $9,000 per year × 1.5 years = 13,500
8 years
Machine 103:

$30,000 − 3,000
= $3,000 per year × 4/12 = 1,000
9 years
Accumulated depreciation, 12/31/12 $33,400
Requirement 2
To record depreciation on machine 102 through date of sale.

March 31, 2023

Depreciation expense ($9,000 per year × 3/12).................... 2,250

7-70
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Accumulated depreciation—equipment...................... 2,250

To record sale of equipment.

March 31, 2023

Cash................................................................................ 52,500
Accumulated depreciation ($13,500 + 2,250).................... 15,750
Loss on sale of equipment (determined below).................. 11,750
Equipment................................................................... 80,000

7-71
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-9 (continued)

Loss on sale of machine 102:
Proceeds $52,500
Less book value on 3/31/21:
Cost $80,000
Less accumulated depreciation:
Depreciation through 12/31/22 $13,500
Depreciation from 1/1/23 to
3/31/23 ($9,000 × 3/12) 2,250 15,750 64,250
Loss on sale $11,750
Requirement 3
Building:
Useful life of the building:
$200,000
= $40,000 in depreciation per year
5 years
(2018–2022)

$840,000 − 40,000
= 20-year useful life
$40,000
To record depreciation on the building.

Depreciation expense [($840,000 − 40,000) ÷ 20 years]....... 40,000

Accumulated depreciation—building......................... 40,000

7-72
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-9 (concluded)

To record depreciation on the equipment.

Depreciation expense (determined below).......................... 15,775

Accumulated depreciation—equipment...................... 15,775

Equipment:
Machine 103 (determined above) $ 3,000
Machine 101:
Cost $70,000
Less: Accumulated depreciation 18,900
Book value, 12/31/22 51,100
Revised remaining life (7 years − 3 years) ÷ 4 years 12,775
$15,775

a. This is a change in estimate.

Problem 7-10

No entry is needed to record the change.

2023 adjusting entry:

Depreciation expense (determined below) ......................... 370,000
Accumulated depreciation ......................................... 370,000

Calculation of annual depreciation after the estimate change:

$10,000,000
Cost
$250,000 Previous depreciation ($10,000,000 ÷ 40 years)
× 3 yrs (750,000) Depreciation to date (2020–2022)
9,250,000 Undepreciated cost
÷ 25 yrs. Estimated remaining life (25 years: 2023–2047)
$ 370,000 New annual depreciation

7-73
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-10 (concluded)

b. This is accounted for as a change in estimate.

Depreciation expense (below) .......................21,000

Accumulated depreciation ............. 21,000

SYD
2019 depreciation $ 60,000 ($330,000 × 10/55)
2020 depreciation 54,000 ($330,000 × 9/
55)
2021 depreciation 48,000 ($330,000 × 8/ )
55
2022 depreciation 42,000 ($330,000 × 7/ )
55
Accumulated depreciation $204,000

$330,000 Cost
204,000 Depreciation to date, SYD (above)
126,000 Undepreciated cost as of 1/1/23
0 Less residual value
126,000 Depreciable base
÷ 6 yrs Remaining life (10 years − 4 years)
$ 21,000 New annual depreciation

c. This does not involve any change in estimates.

Because the change will be effective only for assets placed in service after the
date of change, depreciation schedules do not require revision because the change
does not affect assets depreciated in prior periods.

Problem 7-11Requirement 1

7-74
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Analysis:
Correct Incorrect
(Should Have Been Recorded) (As Recorded)
2021 Equipment 1,900,000 Equipment 2,000,000
Expense 100,000 Cash 2,000,000
Cash 2,000,000

2021 Expense 475,000 [1] Expense 500,000 [2]

Accum. deprec. 475,000 Accum. deprec. 500,000

2022 Expense 356,250 [3] Expense 375,000 [4]

Accum. deprec. 356,250 Accum. deprec. 375,000

[1] $1,900,000 × 25% (two times the straight-line rate of 12.5 percent)
[2] $2,000,000 × 25%
[3] ($1,900,000 − 475,000) × 25%
[4] ($2,000,000 − 500,000 ) × 25%

During the two-year period, depreciation expense was overstated by $43,750,

but other expenses were understated by $100,000, so net income during the
period was overstated by $56,250, which means retained earnings is currently
overstated by that amount.

During the two-year period, accumulated depreciation was overstated and

continues to be overstated by $43,750.

To correct incorrect accounts

Retained earnings................................................. 56,250
Accumulated depreciation ................................................. 43,750
Equipment......................................................... 100,000

7-75
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-11 (concluded)

Requirement 2
This is a change in accounting estimate.

No entry is needed to record the change.

2023 adjusting entry:

Depreciation expense (determined below)................... 178,125
Accumulated depreciation ....................................... 178,125

A change in depreciation method is considered a change in accounting estimate.

Accordingly, the Collins Corporation reports the change prospectively; previous
financial statements are not revised. Instead, the company simply employs the
straight-line method from now on. The undepreciated cost remaining at the time of
the change is depreciated straight-line over the remaining useful life.

Asset’s cost (after correction) $1,900,000

Accumulated depreciation to date ($475,000 + 356,250) (831,250)
Undepreciated cost, January 1, 2023 1,068,750
Estimated residual value (0)
To be depreciated over remaining six years 1,068,750
÷ 6
years
Annual straight-line depreciation 2023–2028 $ 178,125

Problem 7-12Requirement 1
Plant and equipment:
Depreciation to date:
$150 million  10 years = $15 million per year × 3 years = $45 million
Book value: $150 million − $45 million = $105 million
Patent:
Amortization to date:
$40 million  5 years = $8 million per year × 3 years = $24 million

7-76
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Book value: $40 million − $24 million = $16 million

Requirement 2
Property, plant, and equipment and finite-life intangible assets are tested for
impairment only when events or changes in circumstances indicate book value may
not be recoverable (i.e., objective evidence indicative of impairment).
Requirement 3
Goodwill should be tested for impairment on an annual basis and in between
annual test dates if events or circumstances indicate that the fair value of the reporting
unit is below its book value.
Requirement 4
Plant and equipment:
An impairment loss is indicated because the book value of the assets, $105
million, is greater than the recoverable amount of $60 million, which is the greater of
the value in use and the fair value less costs to sell. The amount of the impairment
loss is determined as follows:
Book value $105 million
Recoverable amount (60) million
Impairment loss 45 million

Patent:
There is no impairment loss because the recoverable amount of $20 million,
which is the higher of the value in use and fair value less costs to sell, exceeds book
value of $16 million.

7-77
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-12 (concluded)

Goodwill:
The amount of the impairment loss is determined as follows:

Determination of Ellison’ carrying amount:

Book value of Ellison’s assets (390 million − 45 million) $345 million
Book value of goodwill 100 million
Bookvalue of Ellison $ 445 million

Measurement of impairment loss:

Book value of Ellison $445 million
Recoverable amount of Ellison (425) million
Impairment loss $20 million

7-78
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-13
The land and building are accounted for using the cost method prior to the change in
use and the fair value method after the change in use.

Land Building
Cost 1/1/22 1,000,000 500,000
2012 depreciation - (25,000)
Book value 1,000,000 475,000
Revaluation gain (loss) 100,000 -
Revalued amount 31/12/22 1,100,000 475,000

Revalued amount 1/1/23 1,100,000 475,000

2023 depreciation - (25,000)
Book value 1,000,000 450,000
Revaluation gain (loss) 100,000 (50,000)
Revalued amount 31/12/23 1,200,000 400,000

Revalued amount 1/1/24 1,200,000 400,000

2024 depreciation - (22,222)
Book value 1,200,000 377,778
Revaluation gain (loss) 200,000 (77,778)
Revalued amount 31/12/24 1,400,000 300,000

The journal entry to record the change in use of the resort land and building on
January 1, 2024:
Dr Land (IP) 1,200,000
Cr Land (PPE) 1,200,000

Dr Building (IP) 400,000

Cr Building (PPE) 400,000

Problem 7-14
Requirement 1

Hecala’s cost of the mineral mine is $13,721,871 determined as follows:

Mining site $10,000,000

7-79
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Development costs 3,200,000

Restoration costs 521,871†
$13,721,871
†
$600,000 × 30% = $180,000
700,000 × 30% = 210,000
800,000 × 40% = 320,000
$710,000 × .73503* = $521,871
*Present value of $1, n = 4, i = 8%

Requirement 2
Depletion:
$13,721,871  800,000 tons = $17.1523 per ton

120,000 tons × $17.1523 = $2,058,276

Depreciation of machinery:

$140,000 − 10,000 = $.1625 per ton

800,000 tons

120,000 tons × $.1625 = $19,500

Depreciation of structures:

$68,000  800,000 tons = $.085 per ton

120,000 tons × $.085 = $10,200

7-80
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-14 (continued)

Requirement 3
Depletion of natural resources and depreciation of assets used in the extraction of
natural resources are part of product cost and therefore are included in the cost of the
inventory of the mineral, just as the depreciation on manufacturing equipment is
included in inventory cost. The depletion and depreciation are then included in cost of
goods sold in the income statement when the mineral is sold.

Requirement 4
A change in the service life of plant and equipment and finite-life intangible
assets is accounted for as a change in an estimate. The change is accounted for
prospectively by simply depreciating/depleting the remaining depreciable/depletable
base of the asset (book value at date of change less estimated residual value) over the
revised remaining service life (tons of ore in this case).

2024 Depletion:

Original cost $13,721,871

Less: 2013 depletion (2,058,276)
Remaining depletable cost $11,663,595
 Revised estimate of tons
remaining (1,000,000 − 120,000) 880,000 tons
Depletion rate $13.2541 per ton
× Tons extracted 150,000 tons
2024 Depletion $1,988,115

7-81
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Problem 7-14 (concluded)

2024 Depreciation of machinery:

Original cost $140,000

Less: 2023 depreciation (19,500)
$120,500
Less: residual value (10,000)
Remaining depreciable cost $110,500
 Revised estimate of tons
remaining (1,000,000 − 120,000) 880,000 tons
Depreciation rate $.1256 per ton
× Tons extracted 150,000 tons
2024 Depreciation $18,840

2024 Depreciation of structures:

Original cost $68,000

Less: 2023 depreciation (10,200)
Remaining depreciable cost $57,800
 Revised estimate of tons
remaining (1,000,000 − 120,000) 880,000 tons
Depreciation rate $.0657 per ton
× Tons extracted 150,000 tons
2024 Depreciation $9,855

7-82
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Cases
The terms depreciation, depletion, and amortization all
Analysis Case 7-1refer to the same process of allocating the cost of property
and equipment and finite-life intangible assets to the periods
benefited by their use. However, each term is applied to a different type of long-lived
asset; depreciation is used for plant and equipment, depletion for natural resources,
and amortization for intangibles.
There are differences in determining the factors necessary to calculate
depreciation, depletion, and amortization but the concepts involved are the same. The
service life of plant and equipment and natural resources is limited to physical life,
while the service life of intangible assets is limited to the asset’s legal or contractual
life, whichever is shorter.
The majority of companies use straight-line depreciation and straight-line
amortization. Natural resources usually are depleted using the units-of-production
method.
Suggested Grading Concepts and Grading
Communication Case 7-2 Scheme:
Content (70%)
_______ 50 Explains the concept of depreciation as a process of
cost allocation, not valuation.
______ Rational match versus market fluctuations.
______ Numerical example.

_______ 10 Purpose of the balance sheet is to provide information about

financial position, not to directly measure company value.

_______ 10 Purpose of the income statement is to provide cash flow

information, not to directly measure the change in company
value.
______
_______ 70 points

Writing (30%)
_______ 6 Terminology and tone appropriate to the audience of
a company president.

_______ 12 Organization permits ease of understanding.

______ Introduction that states purpose.
______ Paragraphs that separate main points.

7-83
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

_______ 12 English
______ Sentences grammatically clear and well organized,
concise.
______ Word selection.
______ Spelling.
______ Grammar and punctuation.
______
_______ 30 points

Judgment Case 7-3Requirement 1

Portland should have selected the straight-line depreciation method when
approximately the same amount of an asset’s service potential is used up each period.
If the reasons for the decline in service potential are unclear, then the selection of the
straight-line method could be influenced by the ease of recordkeeping, its use for
similar assets, and its use by others in the industry.
Requirement 2
a. By associating depreciation with a group of machines instead of each
individual machine, Portland’s bookkeeping process is greatly simplified. Also, since
actual machine lives vary from the average depreciable life, unrecognized net losses
on early dispositions are expected to be offset by continuing depreciation on
machines usable beyond the average depreciable life. Periodic income does not
fluctuate as a result of recognizing gains and losses on machine dispositions.

b. Portland should divide the depreciable base of each machine by its estimated
life to obtain its annual depreciation. The sum of the individual annual depreciation
amounts should then be divided by the sum of the individual capitalized costs to
obtain the annual composite depreciation rate.

Judgment Case 7-4Requirement 1

a. The capitalized cost for the computer includes all costs reasonable and
necessary to prepare it for its intended use. Examples of such costs are the purchase
price, delivery, installation, testing, and setup.
b. The objective of depreciation accounting is to allocate the depreciable base of
an asset over its estimated useful life in a systematic and rational manner. This
process matches the depreciable base of the asset with revenues generated from its
use. Depreciable base is the capitalized cost less its estimated residual value.
Requirement 2
The rationale for using accelerated depreciation methods is based on the
assumption that an asset is more productive in the earlier years of its estimated useful

7-84
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

life. Therefore, larger depreciation charges in the earlier years would be matched
against the larger revenues generated in the earlier years. An accelerated depreciation
method also would be appropriate when benefits derived from the asset are
approximately equal over the asset’s life, but repair and maintenance costs increase
significantly in later years. The early years record higher depreciation expense and
lower repairs and maintenance expense, while the later years have lower depreciation
and higher repairs and maintenance.
There is no necessarily correct answer to the question.
Judgment Case 7-5The support made for the answer given is more important
than the answer itself. Materiality is the critical
consideration.
Information is material if it can have an effect on a decision made by users. One
consequence of materiality is that IFRS needs to be followed only if an item is
material. The threshold for materiality will depend principally on the relative dollar
amount of the transaction.
In this case, is the $70,000 material? Net-of-tax income would be $49,000 higher
if the expenditures were capitalized instead of expensed [$70,000 × (1 − .30)]. This
represents a 4.45 percent increase in income ($49,000 ÷ $1,100,000). The effect on
the balance sheet is small. Shareholders’ equity would be higher by $49,000 if the
expenditures were capitalized. This represents an increase of less than one-half of one
percent. Would these differences have an effect on decision makers? There is no
single answer to this question. The IASB has been reluctant to establish any
quantitative materiality guidelines. The threshold for materiality has been left to
subjective judgment of the company preparing the financial statement and its
auditors.

7-85
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

There is no right or wrong answer to this case.

Communication Case 7-6Both views, expense and capitalize, can be
defended once consideration is given to the
materiality issue. The process of developing and synthesizing the arguments will
likely be more beneficial than any single solution. Each student should benefit from
participating in the process, interacting first with his or her partner, then with the class
as a whole. It is important that each student actively participate in the process.
Domination by one or two individuals should be discouraged.
A significant benefit of this case is that it is forcing students to consider the
subjective nature of materiality when applying IFRS.

Integrating Case 7-7Requirement 1

a. ($ in millions)
Inventory (understatement of 2024 beginning inventory)......... 10
Retained earnings (understatement of 2023 income)......... 10
Note: The 2022 error requires no adjustment because it has self-corrected by 2022.

b.
Retained earnings (2022–2023 patent amortization)............. 6
Patent [($18 million ÷ 6 years) × 2].................................. 6
2024 adjusting entry:
Patent amortization expense ($18 million ÷ 6 years) ......... 3
Patent ........................................................................ 3
c.
2024 adjusting entry:
Depreciation expense (below) ......................................... 4
Accumulated depreciation ........................................ 4

($ in millions)
SYD
2022 depreciation $10 ($30 × 5/15)
2023 depreciation 8 ($30 × 4/15)
Accumulated depreciation $18
$30 Cost
18 Depreciation to date, SYD (above)
12 Undepreciated cost as of 1/1/24

7-86
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

0 Less residual value

12 Depreciable base
÷ 3 yrs. Remaining life (5 years − 2 years)
$ 4 New annual depreciation

7-87
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Case 7-7 (concluded)

Requirement 2
Shareholders’ Net
Assets Liabilities Equity Income Expenses
2022 $640 $330 $310 $210 $150
2022 inventory (12) (12) (12) 12
Patent amortization (3) (3) (3) 3
Depreciation no adjustments to prior years
____ ____ ____ ____ ____
$625 $330 $295 $195 $165

2023 $820 $400 $420 $230 $175

2022 inventory 12 (12)
2023 inventory 10 10 10 (10)
Patent amortization (6) (6) (3) 3
Depreciation no adjustments to prior years
____ ____ ____ ____
____
$824 $400 $424 $249 $156

Judgment Case 7-8Requirement 1

A change from the sum-of-the-years’ digits method of depreciation to the
straight-line method for previously recorded assets is a change in accounting estimate.
Both the sum-of-the-years’ digits method and the straight-line method are generally
accepted. Depreciation method is changed when there is change in the usage of an
asset that affects the pattern of consumption of the benefits accruing from the asset.
Requirement 2
A change in the expected service life of an asset arising because of more
experience with the asset is a change in accounting estimate. A change in accounting
estimate occurs because future events and their effects cannot be perceived with
certainty. Estimates are an inherent part of the accounting process. Therefore,
accounting and reporting for certain financial statement elements requires the exercise
of judgment, subject to revision based on experience.

Research Case 7-9Requirement 1

The authoritative guidance on the impairment of property, plant, and equipment,
and intangible assets is found in IAS No. 36 Impairment of Assets.

7-88
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 2
Property, plant, and equipment and finite-life intangible assets are tested for
impairment only when events or changes in circumstances indicate book value may
not be recoverable.
Intangible assets with indefinite useful lives, including goodwill, should be
tested for impairment on an annual basis and in between annual test dates if events or
circumstances indicate that the fair value of the reporting unit is below its book value.
Requirement 3
Property, plant, and equipment and finite-life intangible assets:
Determining whether to record an impairment loss and actually recording the
loss is a two-step process. The first step is to determine the asset’s recoverable
amount, which is the higher of the asset’s fair value less costs to sell and value in use
(the discounted sum of estimated future net cash flows from an asset). The
measurement of impairment loss—step 2—is the difference between the asset’s book
value and its recoverable amount.
Intangible assets with indefinite useful lives (other than goodwill):
The measurement of an impairment loss for indefinite-life intangible assets other
than goodwill is similar to that for property, plant, and equipment, and finite-life
intangible assets.
Goodwill:
Determining whether to record an impairment loss and actually recording the
loss is a two-step process. Step 1: Identify the cash-generating unit (CGU) to which
the goodwill should be allocated and determine whether there is any indication that
the CGU might be impaired. If there is any indication of impairment, perform the
impairment test on the CGU. Step 2: A goodwill impairment loss is measured as the
excess of the CGU’s book value (inclusive of the book value of the goodwill) over its
recoverable amount. If the impairment loss exceeds the book value of the goodwill,
the excess loss is written off against the assets in the CGU.

7-89
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Case 7-9 (concluded)

Requirement 4
Property, plant, and equipment and intangible assets should be classified as held-for-
sale if their carrying amount will be recovered principally through a sale transaction
rather than through continuing use. For this to be the case, all of the following criteria
should be met in the period:

a. Management, having the authority to approve the action, commits to a plan to

sell the asset.
b. The asset or asset group is available for immediate sale in its present
condition.
c. An active program to locate a buyer and other actions required to complete the
plan to sell the asset or asset group have been initiated.
d. The sale is probable.
e. The asset or asset group is being actively marketed for sale at a price that is
reasonable in relation to its current fair value.
f.Actions required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn.

The specific reference for these criteria can be found in IFRS No. 5 Non-current
Assets Held for Sale and Discontinued Operations.
Requirement 5
Property, plant, and equipment and intangible assets or groups of these assets
classified as held-for-sale are measured at the lower of its (a) book value or (b) fair
value less cost to sell. An impairment loss is recognized for any write-down to fair
value less cost to sell.

Ethics Case 7-10Requirement 1

2023 expense using CEO's approach:

$42,000,000 Cost
$4,200,000 Previous annual depreciation ($42,000,000 ÷ 10 years)
× 2 years 8,400,000 Depreciation to date (2021–2022)
33,600,000 Book value
÷ 3 Estimated remaining life (2023–2025)
$11,200,000 New annual depreciation

2023 income would include only depreciation expense of $11,200,000.

7-90
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

2023 expense using Heather’s approach:

$42,000,000 Cost
$4,200,000 Previous annual depreciation ($42,000,000 ÷ 10 years)
× 2 years 8,400,000 Depreciation to date (20217–2022)
33,600,000 Book value
12,900,000 Write-down
20,700,000 New depreciable base
÷ 3 Estimated remaining life (2023–2025)
$ 6,900,000 New annual depreciation

2023 income would include depreciation expense of $6,900,000 and an asset write-
down of $12,900,000 for a total income reduction of $19,800,000.

Using Heather’s approach, 2023s before tax income would be lower by $8,600,000
($19,800,000 − 11,200,000).

7-91
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Case 7-10 (concluded)

Requirement 2
Discussion should include these elements.

Facts:
IFRS provides guidance for recording impairment losses on partial write-downs
of property, plant, and equipment and intangible assets remaining in use. Assets
should be written down if there has been a significant impairment of value such as in
decreased product demand and full recovery of book value through use or resale is
not expected. Although the decision and computation to record an impairment loss
often is very subjective and difficult to measure, Heather is able to estimate an
equipment impairment of $12,900,000, presumably using the best information
available. The simple revision in service life approach is clearly an effort to enhance
net income on the part of the CEO.

Ethical Dilemma:
Is Heather’s obligation to challenge the questionable application of revision in
service life more important than her obligation to her boss and to the company’s
effort to reflect a favorable net income?

Who is affected?

Heather
CEO and other managers
Other employees
Shareholders
Potential shareholders
Creditors
Company auditors

Judgment Case 7-11Requirement 1

By changing its depreciation method, a company can shift reported income
between periods. For example, a shift from an accelerated method to the straight-line
method increases income in the year of the change. However, in some future period
or periods, income will be lower than it would have been if the change had not been
made.
This is not an effective way to manage earnings because it cannot be used too
often and the difference in depreciation expense may not be large.

7-92
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 2
A company can manage earnings by changing the estimated useful lives of
depreciable assets. For example, reducing useful lives causes a decrease in income in
one or more years including the year of the change, and increases income in some
future years.
This is not an effective way to manage earnings because it cannot be used too
often and the difference in depreciation expense may not be large.
Requirement 3
One possible approach to answering this question is to assume that a company
overstates its impairment loss. For example, assume that the book value of
depreciable assets is $20 million. The fair value of these assets is estimated to be $13
million, indicating an impairment loss of $7 million. If these assets are written down
to $8 million, the company has effectively shifted $5 million in pretax income from
the current period to future periods. By writing down the assets to $8 million instead
of $13 million, future depreciation is $5 million less than it would have been with a
more appropriate write-down.

7-93
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Judgment Case 7-12

In this case, the market value of the building is expected to increase gradually
over the next four years. If the cost method is used, any subsequent increase in
market value of the building will not be recorded. Meanwhile, depreciation will be
charged to the income statement. However, when the building is sold after four years,
the entire appreciation in value (plus an amount equal to the total depreciation
charges) will be recognized as gain on disposal in the income statement in the year of
disposal.
If the revaluation method is used, the gains in market value over the four years
will be recorded under other comprehensive income (not via the income statement).
Meanwhile, depreciation will be charged to the income statement. On disposal of the
building, the entire revaluation reserve is transferred directly to retained earnings and
not through the income statement. Only the market appreciation in the year of
disposal will be reflected in the income statement.
If the fair value method is used, the gains in market value over the four years
will be recorded as fair value gains in the income statement. Under the fair value
method, no depreciation will be recorded. Thus, the market appreciation will be
captured evenly in the income statement over the four years.
Overall, the fair value method will result in market gain being recognized in each
year’s income statement, resulting in a smoother earnings trend. On the other hand,
the revaluation method will show no market gain related to the building over the four
years including the year in which the building is disposed. While the cost method also
shows no market gain related to the building over the four years, it will report a large
gain in the year in which the building is disposed. Over the same periods, the total
gain reported in the income statements should be the same under the cost method and
the fair value method.

Judgment Case 7-13

Transaction Disposition
1. Transaction is correctly recorded as repairs and maintenance
expense.
2. Transaction is correctly recorded as repairs and maintenance
expense.
3. Transaction is incorrectly recorded. The amount should be
capitalized as part of the cost of the plant.
4. Transaction is incorrectly recorded. The amount should be

7-94
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

capitalized and the carrying amount of the replaced air

conditioning should be removed.
5. Transaction is correctly recorded as repairs and maintenance
expense.
6. Transaction is correctly recorded as repairs and maintenance
expense.
7. Transaction is incorrectly recorded. The amount should be
capitalized as equipment.
8. Transaction is correctly recorded as repairs and maintenance
expense.

Real World Case 7-14Requirement 1

($ in millions)
Property, plant, and equipment (Cost):
Balance, beginning of 2020 $24,221
Add: Acquisitions during 2020 2,586
Less: Balance end of 2020 (24,906)
Dispositions during 2020 $ 1,901

Property, plant, and equipment (Accumulated depreciation):

Balance, beginning of 2020 $11,835
Add: Depreciation for 2020 2,220
Less: Balance end of 2020 (12,367)
Accumulated depreciation of 2020 dispositions $ 1,688

Gain (loss) on 2020 dispositions:

Cost of dispositions $ 1,901
Less: Accumulated depreciation of dispositions (1,688)
Book value of dispositions $ 213

Proceeds from dispositions $1,469

Less: Book value of dispositions (213)
Gain on 2020 dispositions $1,256
Requirement 2
2020 depreciable assets:

7-95
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Property, plant, and equipment $24,906

Less: Land (682)
Cost of depreciable assets $24,224

Assuming that Caterpillar uses the straight-line depreciation method,

$24,224 ÷ $2,220 (2020 depreciation) = 10.91 years.
The approximate average service life of Caterpillar’s depreciable assets is 11 years.

Real World Case 7-15Requirement 2

Based on GlaxoSmithKline’s December 31, 2017, Annual Report.
GlaxoSmithKline values its property, plant, and equipment at cost less accumulated
depreciation. IFRS also allows the valuation of these assets at fair value (revaluation).
If revaluation is chosen, all assets within a class of PP&E must be revalued on a
regular basis. US GAAP does not allow the revaluation option. Property, plant, and
equipment must be valued at cost less accumulated depreciation.

7-96
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

Requirement 3
GlaxoSmithKline does not reverse impairment losses recognized on goodwill under
IFRS. Both IFRS and US GAAP prohibit the reversal of goodwill impairment.

Analysis Case 7-16Based on Singapore Airlines (SIA) Limited’s March 31,

2017, Annual report.
Requirement 1
SIA and its subsidiaries reported a total depreciation of $1,552.1 million and a
total amortization of $39.8 million in its Consolidated Profit and Loss Account; see
notes 20 and 21 for detailed breakdown.
Requirement 2
Singapore Airlines Limited discloses the following:

7-97
Chapter 7: Property, Plant and Equipment, Investment Property, and Intangible Assets: Utilization and Impairment

7-98