Question

(Impairment) The management of Sprague Inc. was discussing whether certain equipment should be written off as a charge to curent operations because of obsolescence. This equipment has a cost of $900000 with depreciation to date of $400000 as of December 31, 2015 management projected the present value of future net cash flows from this equipment to be $300000 and its fair value less cost of diposal to be $280000. The company intend to use this equipment in the future. The remaining useful life of the equipment is 4 years.

1) Prepare the journal entry (if any) to record the impairment at December 31, 2015
2) Where should the gain or loss (if any) on the write-down be reported in the income statement?
3) At December 31, 2016, the equipment's recoverable amount is $270000. Prepare the jornal entry (if any)
4) What accounting issues did management face in accounting for this impairment?

Answer 1

	Cost of Equipment	$900,000
	Depreciation to date	$400,000
	projected present value of future net cash flows	$300,000
	fair value less cost of diposal	$280,000
	remaining useful life	4 years
1	Prepare the journal entry (if any) to record the impairment at December 31, 2015
	Cost of Equipment	$900,000
Less:	Depreciation to date	($400,000)
	Carrying amount of Equipment	$500,000
	projected present value of future net cash flows	$300,000
	Carrying amount of Equipment	$500,000
	In the present case future net cash flows from the use of the asset
	is less than its carrying amount which means impairment has occurred
	Impairment Loss = Carrying amount of equipment - Fair Valueof asset
	;= $500000-$280000
	$                                                                                220,000.00
	Journal Entry to be recorded will be :
	Loss on Impairment	$ 220,000.00
	To Accumulated depreciation		$ 220,000.00
	(Being Impairment loss recognised)
	2) Where should the gain or loss (if any) on the write-down be reported in the income statement?
	Impairment Gain/(Loss) is being shown in the Income Statement
	other expenses where we report other operating Income or expense.
	3) At December 31, 2016, the equipment's recoverable amount is $270000. Prepare the jornal entry (if any)
	In the year 2015 impairment loss of $220000is recognised and asset has been valued at $280000
	After the impairment in the year 2015, an asset is considered to have new cost basis and therefore
	reversal of impairment loss recognised earlier is not permited
	Therefore, no entry will be recorded
	4) What accounting issues did management face in accounting for this impairment?
	The issues that are being faced by the management while recording the impairment is
	determination of their carrying amount, fair value and recognising whoch assets to be impaired.