Question

GEN Corporation has machinery that is used in its manufacturing process. The accountant has the following information at December 31, 2018 to do the annual impairment test of the machinery.

Cost of the machinery	$37,375,000
Accumulated Depreciation	16,330,000
Estimated total cash flows expected to be generated from the sales of the products manufactured with the machinery	17,250,000
Fair value of the machinery	12,650,000

Instructions:

Determine whether or not the machinery has suffered an impairment loss and calculate the impairment loss, if any.

Prepare the required journal entry to record the impairment loss, if any.

Date	Accounts Title and Explanation	Ref.	Debit	Credit

Assuming that the estimated total cash flows expected to be generated from the sales of the products manufactured with the machinery is $21,850,000, determine whether or not the machinery has suffered an impairment loss and calculate the impairment loss, if any.

Answer 1

To calculate impairment loss = Carrying amount of asset- recoverable amount of asset

carrying amount= book value of asset - accumulated depreciation

carrying amount = 37375000-16330000 =21,045,000$

To calculate recoverable amount we take , higher of -

- fair value ,or

- value in use i.e. estimated total cash flows to be generated

Here value in use which is 17250000$ is higher , therefore we will take that as recoverable amount

Therefore impairment loss would be equal to

21,045,000-17,250,000 =3,795,000$

Thus the journal would be ,

DATE	ACCOUNTS TITLE AND EXPLANATION	DEBIT	CREDIT
31.12.2018	PROFIT & LOSS A/C	3,795,000$
	TO IMPAIRMENT LOSS A/C		3,795,000$
	(BEING IMPAIRMENT LOSS TRANSFERRED TO PROFIT & LOSS A/C)

To calculate impairment loss again we will see the higher of value in use and fair value . Here the value in use to the amount of 21,850,000$ is higher which will be taken as the recoverable amount , therefore we will take that.

To calculate impairment loss = Carrying amount of asset- recoverable amount of asset

=21,045,000-21,850,000 = 0

Here the carrying amount of the asset is less than the recoverable amount of the asset , therefore there is no impairment loss .