(a) Calculate the annual depreciation expense for the years 2010 to 2014 and the carrying amount at December 31, 2014 — Slope Style Snowboarding Company public purchased equipment
Slope Style Snowboarding Company, a public company, purchased equipment on January 10, 2010, for $750,000. At that time, management estimated that the equipment would have a useful life of 10 years and a residual value of $50,000. Slope Style uses the straight-line method of depreciation and has a December 31 year end.
Slope Style tested the equipment for impairment on December 31, 2014, after recording the annual depreciation expense. It was determined that the equipment's recoverable amount was $320,000, and that the total estimated useful life would be eight years instead of ten, with a residual value of $10,000 instead of $50,000.
Instructions
(a) Calculate the annual depreciation expense for the years 2010 to 2014 and the carrying amount at December 31, 2014.
(b) Record the impairment loss, if any, on December 31, 2014.
(c) What will appear on Slope Style's 2014 income statement and balance sheet with regard to this equipment?
(d) Assuming no further impairments or recoveries, calculate the annual depreciation expense for the years 2015 to 2017.
(e) Determine the equipment's accumulated depreciation and carrying amount at the end of its useful life.
TAKING IT FURTHER
Suggest some possible reasons as to why companies are allowed to record recoveries of previously recorded impairments under IFRS but not under ASPE.
SOLUTION
(a)
End of Year
Depreciable Depr.Depr.Accum. Carrying
YearAmount ×Rate =ExpenseDepr.Amount
$750,000
2010 $700,000* 10%** $70,000 $70,000 680,000
2011 700,000 10% 70,000 140,000 610,000
2012 700,000 10% 70,000 210,000 540,000
2013 700,000 10% 70,000 280,000 470,000
2014 700,000 10% 70,000 350,000 400,000
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(c) On Slope’s income statement will be reported depreciation expense in the amount of $70,000 and the impairment loss of $80,000. On Slope’s balance sheet, the equipment will be reported at its cost of $750,000 and accumulated depreciation of $430,000 so that the carrying amount will be $320,000, equal to the impaired amount.
(d)
End of Year
Depreciable Depr.Depr.Accum. Carrying
YearAmount*** ×Rate =ExpenseDepr.Amount
$430,000* $320,000
2015 $310,000 33.33%** $103,333 533,333 216,667
2016 310,000 33.33% 103,333 636,666 113,334
2017 310,000 33.33% 103,334 740,000 10,000
*Accumulated Depreciation = $350,000 end of year before impairment loss + $80,000 impairment loss
(e) Accumulated depreciation at the end of this equipment’s useful life will be $740,000. Carrying amount at the end of this equipment’s useful life will be the amount of residual value which is $10,000. Refer to table in part (d).
Taking It Further:
One of the major differences between IFRS and ASPE concerns the measurement and reporting of depreciable assets. Under IFRS, it is possible to report these types of assets at their fair value, using the revaluation model, while under ASPE, no revaluation beyond a capital asset’s historical cost is possible. Consistent with this distinction, is the treatment of recoveries of previously recorded impairments. The basis for reporting depreciable assets at their fair value under IFRS is that the value used can be reliably measured. As well, under IFRS the frequency of the scrutiny of the assets to determine any impairment is greater and the measures taken more rigorous. Private companies reporting under ASPE typically do not have the same level of resources needed (as a public company reporting under IFRS) to determine if an impairment exists or if it has been reversed. Under ASPE impairments are recorded less frequently and thus it is reasonable that ASPE does not allow the recording of reversals of impairment losses.