Question

Problem 6 : 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.

Required: 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

Answer :-

1 :- Journal entries

Date	Particulars	Debit	Credit
1st Jan,15	Equipment	$2,000,000
	Cash		$2,000,000
	(To record the purchase of equipment)
1st Jan,15	Equipment	$45,674
	Asset retirement obligation		$45,674
	(To record disposal liability, 250,000*0.1826)

2 :- Adjusting journal entries

Date	Particulars	Debit	Credit
31st Dec,15	Depreciation	$136,378
	Accumulated depreciation		$136,378
	( To record the depreciation on equipment, {[250,000*45,674] /15})
31st Dec,15	Interest expense	$5,481
	Asset retirement obligations		$5,481
	( To record the interest, 45,674*12%)

3 :- The equipment is impaired as of the beginning of 2020:-

Cost (2,000,000 + 45,674) = $2,045,674

Less : Depreciation [(2,045,674*5)/15] = -681,891

Carrying amount (2,045,674 - 681,891) = $1,363,783

Then, Calculating the recoverable value amount :-

Net cash inflow from the equipment will be $157,000 per year for 7 years. The fair value of the equipment and the ARO is determined using a 12% discount rate or cost of capital.

12% pv factor for 7 years is 4.563737

$157,000*4.563737 = $716,510.

4 :- Journal entry

Particular	Debit	Credit
Impairment loss	$6,47,273
Reserve		$6,47,273
( To record loss on equipment , 1,363,783 - 716,510 )