Question

Blue Spruce Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $5,100,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2020, new technology was introduced that would accelerate the obsolescence of Blue Spruce’s equipment. Blue Spruce’s controller estimates that expected future net cash flows on the equipment will be $3,187,500 and that the fair value of the equipment is $2,805,000. Blue Spruce intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Blue Spruce uses straight-line depreciation.

What is the carrying value of the equipment at December 31, 2020?

Carrying value

$

Prepare the journal entry (if any) to record the impairment at December 31, 2020. (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.)

	Account Titles and Explanation	Debit	Credit
Dec. 31	loss on impairement	1,020,00
	accum. dep-equip		1,020,000

Prepare any journal entries for the equipment at December 31, 2021. The fair value of the equipment at December 31, 2021, is estimated to be $2,932,500. (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
Dec. 31

Prepare the journal entry (if any) to record the impairment at December 31, 2020. assuming that Blue Spruce intends to dispose of the equipment and that it has not been disposed of as of December 31, 2021. (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
12/31/20

Date	Account Titles and Explanation	Debit	Credit
12/31/21

Answer 1

Answer:(a) Carrying value of asset: $5,100,000 - $1,275,000 = $3,825,000. ($5,100,000 ÷ 8) x 2 = $1,275,000

Future cash flows $3,187,500 Carrying value $3,825,000

Impairment entry: Loss on Impairment A/C Dr. $1,020,000        To Accumulated Depreciation A/C    $ 1,020,000 (3,825,000 - 2,805,000 = 1,020,000)

(b) Depreciation Expense A/C Dr. $ 701,250             To Accumulated Depreciation A/C $ 701,250 ($2,805,000/4=$701,250)

(c ) No depreciation is recorded on impaired assets to be disposed of. Recovery of impairment losses are recorded. Loss on Impairment A/c Dr. $1,020,000        To Accumulated Depreciation A/C    $ 1,020,000 . 12/31/2015 Accumulated Depreciation A/C Dr. $ 127,500                                                To Recovery of Impairment Loss A/C $ 127,500 (2,932,500 - 2,805,000)