Question

Computing and Assessing Plant Asset Impairment
On January 1, Zeibart Company purchases equipment for $220,000. The equipment has an estimated useful life of 10 years and expected salvage value of $25,000. The company uses straight-line depreciation. Four years later, economic factors cause the fair value of the equipment to decline to $85,000. On this date, Zeibart examines the equipment for impairment and estimates undiscounted expected cash inflows from this equipment of $115,000

(a) Compute the annual depreciation expense relating to this equipment.
$Answer

(b) Compute the equipment's net book value at the end of the fourth year.
$Answer

(c) Apply the test of impairment to this equipment as of the end of the fourth year. Is the equipment impaired?

Yes, because the fair value is less than the net book value.

Yes, because the net book value is greater than the salvage value.

Yes, because the undiscounted expected cash flows are less than net book value.

No, because the net book value minus the salvage value is greater than the undiscounted expected cash flows.

No, because the net book value minus the salvage value is less than the undiscounted expected cash flows.

(d) If the equipment is impaired at the end of the fourth year, compute the impairment loss. (If the equipment is not impaired, enter 0.)
$Answer

Answer 1

a. Annual Depreciation= (Cost of Asset- Salvage Value)/Useful Life

                        =$220000-$25000/10

                         =$ 19,500 p.a.

b. Net Book Value= Cost of Asset- Accumulated Depreciation

=$2,20,000-(19,500*4)

=$ 1,42,000

c. Impairment test

If Recoverable amount < Net book Value- Impairment Loss

If Recoverable amount < Net book Value- No further action

              As per US GAAP, recoverability test is conducted, if there is an indication that future cash flows are less than net book value.

In the current scenario, the net book value minus the salvage value is greater than the undiscounted expected cash flows. Therefore, No Impairment Loss

d. Impairment Loss= 0