Question

ABC Co.'s balance sheet includes the following asset, at December 31, 2019 after annual depreciation has been recorded:

       Equipment....................................................... $120000

       Less: accumulated depreciation....................... (40000)

       Net Book value ................................................. $80000

After performing its annual review for impairment, ABC Co. obtains the following data:

       Equipment’s value in use.................................. $78000

       Equipment’s fair value less disposal costs.......... 76000

The remaining useful life of the asset at January 1, 2020 is 8 years. ABC Co. applies straight-line depreciation to its equipment assets and the equipment has a $6000 residual value. ABC Co. uses IFRS.

Required:

1. Determine the amount of impairment loss (using the rational entity impairment model).
2. Prepare the entry to record the impairment loss.
3. Prepare the journal entry to record the 2020 depreciation.
4. Assume the carrying value of the equipment, after recording 2020 depreciation, at December 31, 2020 is $69000 and that the carrying value of the equipment would have been $70750 if no impairment had been taken in 2019. The recoverable amount of the equipment at December 31, 2020 is $70000. Prepare the journal entry to record the impairment recovery for 2020.

Answer 1

Calculation of Impairment on Equipment

Impairment is calculated by carrying value less recoverable amount. Recovarable amount is Fairvalue or value in use which ever is high. here Recoverable amount is Value in use.

On 31st Dec 2019

Equipment 120000

accumulated Depreciation (40000)

carrying value 80000

Value in use (78000)

Impairment 2000

B

Date                Particular                                            Debit               Credit

31 Dec 2019    Impairment on asset                                                   $2000

Equipment                                                                   $2000

            (Asset impaired by 2000)

C

Date                Particular                                            Debit               Credit

31 Dec 2020    Depreciation                                                               $9000

Equipment                                                                   $9000

            (Asset Depreciated by 9000)

Calculation of depreciation

Carrying value at Jan 1,2020 = 78000

depreciation for the year 2020 = 78000-6000/8 = 9000

D

A recovery of impairment loss cant be exceeded the orginal if the asset was not impaired after depreciation.

here asset value will be 70750 if the asset was nt impaired in 2019. Still the recoverable amount is only 70000

so a recovery of impairment is only possible up to 1000 (70000-69000)

Journal entry to record the recovery.

Date                Particular                                            Debit               Credit

31 Dec 2020    equipment                                                       $1000

Impairment on asset                                                               $1000

            (impairment recovered by 1000)