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Computing and Assessing Plant Asset Impairment Zeibart Company purchases equipment for $225,000 on July 1, 2016,...

Computing and Assessing Plant Asset Impairment

Zeibart Company purchases equipment for $225,000 on July 1, 2016, with an estimated useful life of 10 years and expected salvage value of $25,000. Straight-line depreciation is used. On July 1, 2020, economic factors cause the fair 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, 2020? Explain.

b. If the equipment is impaired on July 1, 2020, compute the impairment loss and prepare a journal entry to record the loss.

c. What amount of depreciation expense would Zeibart record for the 12 months from July 1, 2020 through June 30, 2021? Prepare a journal entry to record this depreciation expense.

(Hint: Assume no change in salvage value.)

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.

Expert Solution

Answer :

(a).

Particulars	Amount ($)
Cost of equipment on 1 July, 2016	225000
Expected salvage value	25000
Useful life (Years)	10
Depreciation per annum = (225000 - 25000) / 10	20000
*Depreciation till 1 July, 2020 (4 Years) = 200004**	80000
Book value on 1 July 2020	145000
Fair value on 1 July 2020	90000
Value in use (Future cash inflows)	125000
Impairment exists if book value is higher than fair value or value in use whichever is higher	-
Higher of fair value and value in use	125000
Book value is more than fair value. It implies there is impairment loss	-

(b).

Book value is more than fair value. It implies there is imparment losss

Impairment loss = 145000 - 125000 = 20000

Particulars	Debit	Credit
Loss on impairment	20000	-
Equipment	-	20000
(To Record impairment loss on equipment)	-	-

(c).

Useful life (Years) Remaining	6
Cost of equipment on 1 July 2020	125000
Salvage value	25000
Depreciation per annum = (125000 - 25000)/6	16666.7

Particulars	Debit	Credit
Depreciation expense	16667	-
Accumulated depreciation - Equipment	-	16667
(To Record impairment loss on equipment)	-	-

(d).

Financial effects template

Balance sheet

Transaction	Cash Asset +	Non cash asset =	Liabilities +	Contributed capital +	Earned capita
b	-	-20000	-	-	-20000
c	-	-16667	-	-	-16667

Income Statement

Transaction	Revenue -	Expenses =	Net income
b	-	20000	-
c	-	16667	-

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