Question

The management of Sage Hill Inc., a small private company that uses the cost recovery impairment model, was discussing whether certain equipment should be written down as a charge to current operations because of obsolescence. The assets had a cost of $930,000, and depreciation of $320,000 had been taken to December 31, 2017. On December 31, 2017, management projected the undiscounted future net cash flows from this equipment to be $340,000, and its fair value to be $230,000. The company intends to use this equipment in the future.

Prepare the journal entry, if any, to record the impairment at December 31, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit December 31, 2017 Show List of Accounts

At December 31, 2018, the equipment’s fair value increased to $310,000. Prepare the journal entry, if any, to record this increase in fair value. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit December 31, 2018 Show List of Accounts

Assume instead that as of December 31, 2017, the equipment was expected to have undiscounted future net cash flows of $630,000, and that its fair value was estimated to be $520,000. Prepare the journal entry to record the impairment at December 31, 2017, if any. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit December 31, 2017 Show List of Accounts

Assume instead that as of December 31, 2017, the equipment was expected to have undiscounted future net cash flows of $54,000 per year for each of the next 10 years, and that there is no active market for the equipment. Luis Inc. uses a 10% discount rate in its cash flow estimates. Prepare the journal entry to record impairment at December 31, 2017, if any. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 1,251.) Click here to view the factor table. Date Account Titles and Explanation Debit Credit December 31, 2017

Answer 1

All amounts are in $

1)

Carrying amount = 930,000 - 320,000 = 610,000

Expected future Cashflows = 340,000

Fair value = 230,000

Since the expected future Cashflows from the asset is less than its carrying cost, we have to impair the assets value by bringing down its carrying amount to fair value

So impairment amount = 610,000 - 230,000 = 380,000

Journal entry on December 31st 2017

Loss on Impairment a/c 380,000

To Accumulated depreciation a/c 380,000

(Impairment expense recognised)

2)

There will be no journal entry.

We should not reverse the impairment loss recognises in earlier years. So we will not make any changes to the carrying amount due to change in fair value in 2018

3)

If on December 31st 2017,

The expected future Cashflows = 630,000

Fair value = 520,000

Carrying amount = 610,000

Then no impairment loss is recognised, as the expected future cash flows are higher than the carrying amount of the asset.

4)

Given the future Cashflows will be 54,000 per year for next 10 years with no salvage value

Present value of future Cashflows = 54,000 x Present value annuity factor for 10 years @ 10

= 54,000 x 6.14457

= 331,807

So impairment will be 610,000 - 331,807 = 278,193

Jounral entry on 31st December 2017

Loss on impairment a/c 278,193

To Accumulated depreciation a/c 278,193

(Difference between carrying amount and present value of future Cashflows recognised as impairment loss)