Question

Mueller Company purchased equipment on January 1, 2015 for $2,000,000. Because of the unique kind of equipment and the possibility of radioactivity from its components, the equipment will require very special disposal at the end of its useful life of 15 years. Mueller estimates the cost of disposal at $250,000 (ARO). The equipment is depreciated using the straight line method. Mueller's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment at the beginning of 2020. The management of Mueller Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $157,000 per year.The fair value of the equipment and the ARO is determined using a 12% discount rate or cost of capital.

1. Show the journal entry needed in 2015 to record the purchase of the equipment and the related disposal liability.
2. Show the adjusting entry needed for the asset and liability at the end of 2015.
3. Determine whether the equipment is impaired as of the beginning of 2020.
4. Show any journal entry needed to record the loss on impairment if needed at the beginning of 2020.

Answer 1

1.)	Journal Entry to record purchase of Equipment:-
	January 1,2015	Equipment	2,000,000
		Cash		2,000,000
	Related Disposal liability
	January 1,2015	Equipment	45,674
		Asset retirement obligation		45,674
		(250,000 x 0.182696)
2.)	Year End 2015:-
	31-Dec-15	Depreciation	136,378
		Accumulated Depreciation- Equipment		136,378
		(2,000,000 + 45,674 ) /15
	31-Dec-15	Interest Expense	5,481
		Asset retirement obligation		5,481
		(45,674 x 12% )

3.)	Impairment test at beginning of 2020:-				Year	PV Factor @12%
					1	0.892857
	Calculation of Carrying Amount of Equipment at beginning of 2020:-		2	0.797194
					3	0.711780
	Cost	2,045,674	(2,000,000 + 45,674 )		4	0.635518
	Less: Depreciation	-681,891	( 2,045,674 x 5 ) / 15		5	0.567427
	Carrying Amount	1,363,783			6	0.506631
					7	0.452349
	Recoverable Amount (Value in Use):-				Total	4.563757
	= $ 157,000 x 4.563757
	= $ 716,510
	Yes, Equipment need to be impaired, because the Recoverable Amount is less than the Carrying Amount.
	Journal Entry to record Loss on Impairement:-
	Impairment Loss	6,47,273
	Reserve for Impairment Loss		6,47,273
	(1,363,783 - 716,510 )