Question

Kingbird Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $12,400,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Kingbird’s equipment. Kingbird’s controller estimates that expected future net cash flows on the equipment will be $7,812,000 and that the fair value of the equipment is $6,944,000. Kingbird intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Kingbird uses straight-line depreciation.

Prepare the journal entry (if any) to record the impairment at December 31, 2017.

Prepare the journal entry for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $7,316,000.

Prepare the journal entry (if any) to record the impairment at December 31, 2017 and for the equipment at December 31, 2018, assuming that Kingbird intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.

Answer 1

Step -1	Calculation of Accumulated Depreciation of equipment as at December 31, 2017:-
a	Cost of Equipment	$12,400,000
b	Salvage Value	$0
c	Depreciable Value of equipment (a-b)	$12,400,000
d	Estimated useful life of equipment (years)	8
e	Depreciation expense per year (c/d)	$     1,550,000
e	Accumulated Depreciation of equipment as at December 31, 2017 (e * 2 years) (Jan 2016 to Dec 2017 = 2 years)	$     3,100,000
Step-2	Calculation of Book Value of equipment as at December 31,2017:-
a	Cost of Equipment	$   12,400,000
b	Accumulated Depreciation of equipment as at December 31, 2017	$     3,100,000
c	Book Value of equipment as at December 31,2017	$     9,300,000
d	Fair Value of equipment	$     6,944,000
e	Impairment Loss (c-d)	$     2,356,000
1	Prepare the journal entry (if any) to record the impairment at December 31, 2017.
Date	Particulars		L.F	Debit	Credit
2017
31-Dec	Loss on Impairment		Dr.	$    2,356,000
	Accumulated depreciation- Equipment				$ 2,356,000
	(To record impairment loss on equipment)
2	Prepare journal entry for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $7,316,000.
Date	Particulars		L.F	Debit	Credit
2017
31-Dec	Depreciation Expense (6944000/4 years)		Dr.	$ 17,360,000
	Accumulated depreciation- Equipment				$17,360,000
	(To record depreciation expense on equipment)
3	Prepare the journal entry (if any) to record the impairment at December 31, 2017 and for the equipment at December 31, 2018, assuming that Kingbird intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.
Date	Particulars		L.F	Debit	Credit
2017
31-Dec	Loss on Impairment		Dr.	$    2,356,000
	Accumulated depreciation- Equipment				$ 2,356,000
	(To record impairment loss on equipment)
2018
31-Dec	Accumulated depreciation- Equipment		Dr.	$       372,000
	Recovery of Impairment Loss				$     372,000
	(To record recovery of impairment loss)
	Calculation of Recovery of Impairment Loss as at December 31,2018:-
a	Fair Value of equipment as at December 31, 2018	$     7,316,000
b	Book Value of equipment as at December 31, 2018 (a-b)	$     6,944,000
c	Recovery of Impairment Loss as at December 31, 2018	$       372,000

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