Question

Computing and Assessing Plant Asset Impairment

Zeibart Company purchases equipment for $225,000 on July 1, 2012, with an estimated useful life of 10 years and expected salvage value of $25,000. Straight-line depreciation is used. On July 1, 2016, economic factors cause the market value of the equipment to decline to $90,000. On this date, Zeibart examines the equipment for impairment and estimates $125,000 in future cash inflows related to use of this equipment.

a. Is the equipment impaired at July 1, 2016?
AnswerYesNo

b. If the equipment is impaired on July 1, 2016, compute the impairment loss and prepare a journal entry to record the loss.

Description	Debit	Credit
AnswerCashAccumulated depreciationDepreciation expenseImpairment lossEquipment	Answer	Answer
AnswerCashAccumulated depreciationDepreciation expenseImpairment lossEquipment	Answer	Answer

c. What amount of depreciation expense would Zeibart record for the 12 months from July 1, 2016 through June 30, 2017? Prepare a journal entry to record this depreciation expense. Round to the nearest dollar. (Hint: Assume no change in salvage value.)

Description	Debit	Credit
AnswerCashAccumulated depreciationDepreciation expenseImpairment lossEquipment	Answer	Answer
AnswerCashAccumulated depreciationDepreciation expenseImpairment lossEquipment	Answer	Answer

d. Using the financial statement effects template, show how the entries in parts b and c affect Zeibart Company’s balance sheet and income statement.

Answer 1

a	Yes, because the undiscounted expected cash flows are less than net book value i.e. $145,000
b	Date	Accounts Titles & Explanation	Debit	Credit
		Impairment Loss on Equipment	$55,000
		Accumulated depreciation		$55,000
	Working
		Cost	$225,000
		Accumulated depreciation	$80,000
		Carrying amount	$145,000
		Fair value	$90,000
		Loss on impairment	$55,000
c		Depreciation Expenses	$15,000
		Accumulated depreciation		$15,000
	Working
		New carrying amount	$90,000
		Useful Life	6 years
		Depreciation per year	$15,000
d
		Impairment Loss on Equipment	$55,000		Extra ordinary item in income statement
		Accumulated depreciation	$55,000		Balance sheet acc. Dep will increase
		Depreciation Expenses	$15,000		Expenses shown in income statement
		Accumulated depreciation	$15,000		Balance sheet acc. Dep will increase