Question

In: Accounting

Mueller Company purchased equipment on January 1, 2015 for $2,000,000. Because of the unique kind of...

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.

Solutions

Expert Solution

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 )

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