Question

Computing and Assessing Plant Asset Impairment

Zeibart Company purchases equipment for $235,000 on July 1, 2012, with an estimated useful life of 10 years and expected salvage value of $28,000. Straight-line depreciation is used. On July 1, 2016, economic factors cause the market value of the equipment to decline to $97,500. On this date, Zeibart examines the equipment for impairment and estimates $127,500 in future cash inflows related to use of this equipment.

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

b. Compute the impairment loss (if any) as of 7/1/2016 as well as the depreciation expense for the 12 months from July 1, 2016 to July 1, 2017. Round calculations to the nearest dollar.
Using the financial statement effects template, show how those two entries affect Zeibart Company’s balance sheet and income statement.

Balance Sheet Transaction Cash Asset + Noncash Assets - Contra Assets = Liabilities + Contrib. Capital + Earned Capital b. Impairment charge $Answer + $Answer - $Answer = $Answer + $Answer + $Answer c. Depreciation expense Answer + Answer - Answer = Answer + Answer + Answer

Income Statement Revenue - Expenses = Net Income $Answer - $Answer = $Answer Answer - Answer = Answer

Answer 1

Ans:

Impairment loss is occured when there is a permanent decline in the market value of asset or benefit derived from such assets in future are less than its carrying value in books of accounts.

Here carrying value means Acquisition cost of asset minus depriciation.

Market value of asset means net realisable value of the asset on that date

Benifits derived from such asset is expexted future cash flow from such asset.

In the given question, all these three are as follows:

a.) Carrying Amount of asset as on 1 July, 2016

Acquisitin cost - Accumlated depriciation

=235000-[(235,000-28000)*4/10]

=152,200

b.) Recoverable amount is higher of realisable value of asset and amount of future cash flows.

Future Cash Flows = 127,500

Realisable value = 97,500

Recoverable amount = 127,500

a;)Yes, equipment is impaired since asset net recoverable amount is less than its carrying value, asset is impaired by 152,200-127500 = $24,700

b.) Zeibrat Company should recognise this impairment loss in its books of account by passing following journal entry:

Impariment Expenses A/c Dr $24,700

Accumlated Impairment A/c $24,700

Depriciation for year ended 30 June, 2017 is =127,500*1/6 = $21,250

Journal entry will be

Depriciation Expense A/c Dr. 21,250

Accumlated Depriciation A/c 21,250

Balance Sheet
Transaction	Cash Asset	+	Non Cash Asset	-	Contra Asset	=	Liabilities	+	Contra Liabilities	+	Earned Capital
b.) Impairment Expense	0		0		24,700		0		0		0
C.) Depriciation Expense	0		0		104050		0		0		0

Depriciation expenses is = 82800+21250 = 104,050

Accumlate deprication is cumulative of all year depriciation but expense for only current year deprication is recognised since previous year depriciation is recognised in previous years.

Income Statement
Reveunue	-	Expense	-	Net Income
0		24700
0		21250

Note:

Since only these two entries details are provided other column in both table is inffected. These tables are extract of balance sheet and income statement for the year.