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Chapter 11: Q16E (page 588)

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

Short Answer

Expert verified

The accounting standards require that if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, then the carrying amount of the asset should be assessed.

Step by step solution

01

Meaning of Write-Down 

During a write-down, a business reduces the carrying amount of an asset in a way other than by depreciating and amortizing.The value of an asset is usually written down when its market value drops below its carrying amount.

02

Explaining to the management of Walkin to determine whether a write-down is permitted.

If events or changes in circumstances suggest that the carrying amount of such assets may not be recovered, the carrying amount of the asset must be reviewed, according to accounting principles. The evaluation or review takes the form of a recoverability test, which compares the carrying amount to the total of the asset's estimated future cash flows (undiscounted).

The asset has been impaired if the cash flows are less than the carrying amount. The impairment loss is calculated as the difference between the carrying amount and the asset's fair value. If there is an active market for the item, its fair value is determined by its market value. If there isn't a market price for the asset, the present value of the asset's estimated future net cash flows might be utilized instead.

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Most popular questions from this chapter

Francisco Corporation is constructing a new building at a total initial cost of \(10,000,000. The building is expected to have a useful life of 50 years with no residual value. The building鈥檚 finished surfaces (e.g., roof cover and floor cover) are 5% of this cost and have a useful life of 20 years. Building services systems (e.g., electric, heating, and plumbing) are 20% of the cost and have a useful life of 25 years. The depreciation in the first year using component depreciation, assuming straight-line depreciation with no residual value, is:

  1. \)200,000.
  2. \(215,000.
  3. \)255,000.
  4. None of the above.

(Depreciation鈥擟onceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years鈥�-digits method, and (3) the double-declining-balance method.

Year

Straight-Line

Sum-of-the Years鈥�-Digits

Double-Declining Balance

1

\( 9,000

\) 15,000

\(20,000

2

9,000

12,000

12,000

3

9,000

9,000

7,200

4

9,000

6,000

4,320

5

9,000

3,000

1,480

Total

\)45,000

\(45,000

\)45,000

Instructions

Answer the following questions.

  1. What is the cost of the asset being depreciated?
  2. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
  3. Which method will produce the highest charge to income in Year 1?
  4. Which method will produce the highest charge to income in Year 4?
  5. Which method will produce the highest book value for the asset at the end of Year 3?
  6. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

(Depreciation for Fractional Periods) On March 10, 2019, Lost World Company sells equipment that it purchased for \(192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of \)16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight line method of depreciation.

Instructions

  1. (a) Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, inclusive, under each of the six following assumptions with respect to partial periods.
    1. Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for base and record depreciation through March 9, 2019.)
    2. Depreciation is computed for the full year on the January 1 balance in the asset account.
    3. Depreciation is computed for the full year on the December 31 balance in the asset account.
    4. Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
    5. Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
    6. Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)
  2. (b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.

(Depreciation Computations鈥擲L, SYD, DDB) Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of \(469,000. The asset is expected to have a service life of 12 years and a salvage value of \)40,000.

Instructions

  1. Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
  2. Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years鈥�-digits method.
  3. Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)

Explain how gains or losses on impaired assets should be reported in income.
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