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P11.7 (LO1, 2) (Depreciation for Partial Periods—SL, Act., SYD, and DDB) On January 1, 2017, a machine was purchased for $90,000. The machine has an estimated residual value of $6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2017, 20,000 hours; 2018, 25,000 hours; 2019, 15,000 hours; 2020, 30,000 hours; and 2021, 10,000 hours. Instructions a. Compute the annual depreciation charges over the machine's life assuming a December 31 yearend for each of the following depreciation methods. 1. Straight-line method. 2. Activity method. 3. Sum-of-the-years'-digits method. 4. Double-declining-balance method. b. Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset's life applying each of the following methods. 1. Straight-line method. 2. Sum-of-the-years'-digits method. 3. Double-declining-balance method. Answer : a. Depreciation methods 1. Straight Line Method Date



Depn. Amt.



Carrying/Book value



1



2=(90000-6000)/5=16800



3=Prev.3-Current 2



Jan 1 2017



90000



31-Dec-17



16800



73200



31-Dec-18



16800



56400



31-Dec-19



16800



39600



31-Dec-20



16800



22800



31-Dec-21



16800



6000



Total



84000



2. Activity Method Date



Depn. Amt.



Carrying/Book value



1



2



3



Jan 1 2017



4=prev.4-curr.3 90000



Date



Depn. Amt.



Carrying/Book value



31-Dec-17



20000/100000*84000=



16800



73200



31-Dec-18



25000/100000*84000=



21000



52200



31-Dec-19



15000/100000*84000=



12600



39600



31-Dec-20



30000/100000*84000=



25200



14400



31-Dec-21



10000/100000*84000=



8400



6000



84000 3. Sum of Digits Method Date



Depn. Amt.



1



2



3



4=prev.4-curr.3



Jan 1 2017



90000



31-Dec-17



5/15*84000=



28000



62000



31-Dec-18



4/15*84000=



22400



39600



31-Dec-19



3/15*84000=



16800



22800



31-Dec-20



2/15*84000=



11200



11600



31-Dec-21



1/15*84000=



5600



6000



84000



4. Double Declining Balance Method Depreciable amount



90.000 – 6.000 = 84.000



Life = 5 years Depreciation/year Rate of Depreciation Double declining rate



84000/5 16800/84000 20%*2



16800 20% 40%



Date 1



Depn. Amt. 2=Prev 3*40%



Jan 1 2017



3=prev.3-current 2 90000



31-Dec-17



36000



54000



31-Dec-18



21600



32400



31-Dec-19



12960



19440



31-Dec-20



7776



11664



31-Dec-21



4666



6998



Total



83002



b. Assume a fiscal year-end of September 30 1. Straight-line method Date



Depn. Amt.



Carrying/Book value



1



2=(900006000)/5=16800



3=Prev.3-Current 2



Jan 1 2017



90000



30-Sep-17



12600



77400



30-Sep-18



16800



60600



30-Sep-19



16800



43800



30-Sep-20



16800



27000



30-Sep-21



16800



10200



31-Dec-21



4200



6000



Total



84000



16800/12*9=



16800/12*3=



2.



Sum-of-the-years-digits method Date



Depn. Amt.



1



2



3



Jan 1 2017



4=prev.4curr.3 90000



30-Sep-17



5/15*84000*9/12=



21000



69000



30-Sep-18



(5/15*84000*3/12)+(4/15*84000*9/12)= 23800



45200



30-Sep-19



(4/15*84000*3/12)+(3/15*84000*9/12)= 18200



27000



30-Sep-20



(3/15*84000*3/12)+(2/15*84000*9/12)= 12600



14400



30-Sep-21



(2/15*84000*3/12)+(1/15*84000*9/12)= 7000



7400



31-Dec-21



1/15*84000*3/12=



6000



1400



Total



84000



3. Double-declining-balance method Date 1



Depn. Amt. 2=Prev 3*40%



Jan 1 2017



3=prev.3-current 2 90000



30-Sep-17



27000



63000



30-Sep-18



25200



37800



30-Sep-19



15120



22680



30-Sep-20



9072



13608



30-Sep-21



5443



8165



31-Dec-21



817



7348



Total



82652



90000*40%*9/12



8165*40%*3/12



P11.10 (LO3) (Impairment) At the end of 2019, Sapporo Group tests a machine for impairment. The machine is carried at depreciated historical cost, and its carrying amount is ¥150,000. It has an estimated remaining useful life of 10 years. The machine's recoverable amount is determined on the basis of a value-in-use calculation, using a pretax discount rate of 15%. Management-approved budgets reflect estimated costs necessary to maintain the level of economic benefit expected to arise from the machine in its current condition. The following information related to future cash flows is available at the end of 2019 (amounts in thousands). Year



Year Future Cash Flow



Year



Year Future Cash Flow



2020



¥22,165



2025



¥24,825



2021



21,450



2026



24,123



2022



20,550



2027



25,533



2023



24,725



2028



24,234



2024



25,325



2029



22,850



Instructions Part I a. Compute the amount of the impairment loss at December 31, 2019. b. Prepare the journal entry to record the impairment loss, if any, at December 31, 2019. Part II In the years 2020–2022, no event occurs that requires the machine's recoverable amount to be reestimated. At the end of 2023, costs of ¥25,000 are incurred to enhance the machine's performance. Revised estimated cash flows in management's most recent budget are as follows. Year



Year Future Cash Flow



Year



Year Future Cash Flow



2024



¥30,321



2027



¥31,950



2025



32,750



2028



33,100



2026



31,721



2029



27,999



c. Prepare the journal entry for an impairment or reversal of an impairment at December 31, 2023. Answer :



Year



Future Cash inflow



PV @15%



PV



1



22165



0.870



19284



2



21450



0.756



16.216



3



20550



0.658



13.522



4



24725



0.572



14.143



5



25325



0.497



12.587



6



24825



0.432



10.724



7



24123



0.376



9.070



8



25533



0.327



8.349



9



24234



0.284



6.882



10



22850



0.247



5.644



Value in use



235780



116.421



Carryng Value



= ¥150.000



Recoverable Amount (Value in Use)



= (¥116.421)



Impairment Loss



= ¥ 33.581



Account Name



Debit



Impairment Loss



Credit



33.581



Accumulated Depreciation—Machine



33.581



Year



Future Cash inflow



PV @15%



PV



2024



30321



0.870



26366



2025



32750



0.756



34764



2026



31721



0.658



20857



2027



31950



0.572



18267



2028



33100



0.497



16457



2029



27999



0.432



12105



Value in use



187.841



118816



Calculation : Carrying Amount at the end of 2019 (Part I)



$116.419



Depreciation charge 2020 to 2023 ($116,419/10) x 4



($46.568)



Costs to enhance the asset’s performance



$25.000



Carrying amount before reversal



$94.851



A—Recoverable amount (Value-in-use)



$118.814



B—Carrying amount based on depreciated historical cost



$115.000



*calculation Original cost



$150.000



Accumulated depreciation based on historical cost ($15,000 X 4)



($60.000)



Costs to enhance



$25.000



Carrying amount after reversal—lower of A, B



$115.000



Reversal of the impairment loss $20,149 ($115,000 – $94,851) is recordedas follows.



Account Name Accumulated Depreciation—Machine Recovery of Impairment Loss



Debit



Credit



20.149 20.149