F3-M5-PP&E: Depreciation, Disposal, and Impairment

Question 1

Name the most common depreciation methods. Give the basic formula for calculating each method

Answer 1

Straight-Line:
(cost - salvage) / useful life

Sum of the year’ digits:
(cost - salvage) * (years remaining) / (sum of years)

Double-Declining Balance:
2* straight-line rate * net book value of asset*

*(no deduction of salvage to determine the depreciable base. Depreciate down to salvage value).

Question 2

State the rules for computing depletion on natural resources

Remember it is REAL property

Answer 2

Residual value (subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price

cost of land + extraction dev costs + anticipated restoration costs - residual value = estimated recoverable units

Estimated recoverable units * Units extracted = depletion

Question 3

What is the calculation for impairment losses for property, plant, and equipment under US GAAP

Answer 3

The amount by which the carrying amount exceeds the fair value of the asset.

Question 4

Is restoration of impairment losses permitted under US GAAP

Answer 4

Restoration (reversal of impairment losses) is permitted for assets held for sale. Restoration is prohibited for assets held for use.