Question

Lindenauer Corp. bought a machine on January 1, 2008 for $800,000. The machine had an expected life of 20 years and was expected to have a salvage value of $40,000. The company does not plan to dispose of the machine but does believe it may be impaired. On July 1, 2018, the company reviewed the potential of the machine and determined that its future net cash flows totaled $350,000 and its fair value was $230,000.

1. Calculate the book value of the Lindenauer’s machine immediately prior to the impairment test. (Hint: you will need to consider a partial year depreciation catch-up entry for the first half of 2018.
2. Calculate the impairment loss, if any, as of July 1, 2018 and prepare any journal entry needed.

Answer 1

Given

cost =$800,000

Useful life =20 years

Salvage value=$40,000

Depreciation for each year = (800,000-40,000)/20 = $38,000

So depreciation from Jan 1 ,2008 to Dec 2017(10 years) = 38,000*10= $380,000

Depreciation from Jan 1 2018 to Jul 1 2018 (half year)= =38,000/2 =$19,000

Total depreciation from Jan 1,2008 to July 1,2018 =    $( 380,000+19,000) =$ 399,000

Carrying value on July 1 ,2018 =$( 800,000- 399,000)

=$401,000

IMPAIRMENT LOSS = carrying value less recoverable value

Recoverable value = higher of

a) value in use i.e. future cash flow =$350,000

b)fair value less cost to sell=$230,000

So recoverable value = $350,000

Impairment loss = $(401,000-350,000)

=$51,000

Journal entry ÷

Impairment loss a/c dr. $51,000

To accumulated impairment loss  a/c       $51,000

(Being impairment loss accounted)

NOTE ÷Impairment loss is included in the income statement as an expenses and accumulated impairment loss is adjusted from the carrying amount of the assets.