Question

Question from: International Accounting, Fourth Edition

Company ABC acquired a piece of equipment in Year 1 at a cost of $100,000. The equipment has a 10-year estimated life, zero salvage value, and is depreciated on a straight-line basis. Technological innovations take place in the industry in which the company operates in Year 4. Company ABC gathers the following information for this piece of equipment at the end of Year 4:

Expected future undiscounted cash flows from continued use: $59,000

Present Value of expected future cash flows from continued use: $51,000

Net selling price in the use equipment market: $50,000

At the end of Year 6, it is discovered that the technological innovations related to this equipment are not as affective as first expected. Company ABC estimates the following for this piece of equipment at the end of Year 6.

Expected future undiscounted cash flows from continued use: $50,000

Present Value of expected future cash flows from continued use: $44,000

Net selling price in the use equipment market: $42,000

a. Discuss whether Company ABC must conduct an impairment test on this piece of equipment at Dec 31, Year 4..

b. Determine the amount at which Company ABC should carry this piece of equipment on its balance sheet at December 31, Year4; December 31, Year 5; and December 31, Year 6. Prepare any related journal entries.

Answer 1

Cost of the equipment	100000
Useful life	10 years
Salvage value	Nil
Depreciation under SLM per year	10000
Depreciation till year 4	40000
Written down value of the machine at the end of year 4	60000
Present value of expected future cash flows from continued use	51000
Impairment loss
Written down value of the machine at the end of year 4	60000
Less: Present value expected future cash flows from continued use	51000
Impairment loss to be recognized	9000
December 31, year 4
Carrying value of the machine	51000
Revised depreciation per year	8500
December 31, year 5
Carrying value of the machine	51000
Less: Depreciation	8500
Net carrying value	42500
December 31, year 6
Carrying value of the machine	51000
Less: Depreciation	0
Net carrying value	42500
Less: Depreciation	8500
	34000
Present value of expected future cash flows from continued use	44000
Less: Carrying value after depreciation	34000
Impairment gain	10000
Thus, the revised carrying value as on 31 December, year 6	44000

Date	Particulars	Debit ($)	Credit ($)
December 31, year 4	Impairment loss	9000
	Equipment		9000
	(Being the impairment loss recognized)
	Profit and loss account v	9000
	Impairment loss		9000
	(Being the impairment loss recognized)
December 31, year 6	Equipment	10000
	Impairment gain		10000
	(Being impairment gain recognised)
	Impairment gain	10000
	Profit and loss account v		10000
	(Being impairment gain recognised)