Question

. Presented below is information related to equipment owned by ALALI Company at December 31, 2010.

                        Cost                                                        SAR 7,000,000

                        Accumulated depreciation to date                  1,500,000

                        Value-in-use                                                  5,000,000

                        Fair value less cost of disposal                       4,400,000

Assume that ALALI will continue to use this asset in the future. As of December 31, 2010, the equipment has a remaining useful of 4 years.

Instructions

Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010. ( 1 mark)

Prepare the journal entry to record depreciation expense for 2011. (1 mark)

The recoverable amount of the equipment at December 31, 2011, is SAR 5,250,000. Prepare the journal entry (if any) necessary to record this increase

Answer 1

Calculation for impairment of the asset-

Impairment occurs when a asset suffers a depreciation in fair market value in excess of the book value of the asset, assets that are considered "impaired" must be recognized as a loss.

i.e. Record Impairment if ; carrying amount > Fair value

Cost	7,000,000
Accumulated Depreciation	(1,500,000)
Carrying amount	5,500,000
Fair Value	(4,400,000)
Loss on Impairment	1,100,000

1. Journal Entry for loss on impairment as on Dec 31,2010

Date	Account Name	Debit	Credit
Dec 31,2010	Loss on Impairment	$ 1,100,000
	Accumulated Depreciation Equipment		$ 1,100,000

Calculation of Depreciation Expense for next year (2011)

New Carrying amount $ 5,500,000

Useful life 4 years

Depreciation per year $ 1,375,000

2. Journal Entries for Depreciation expense as on Dec 31, 2011

Date	Account Name	Debit	Credit
Dec 31, 2011	Depreciation Expense	$ 1,375,000
	Accumulated Depreciation Equipment		$ 1,375,000

3. No Entry necessary to record such increase, restoration of impairment is only permitted on asset that have been disposed. Since asset is still in use, restoration of any impaired loss is not permitted.