Question

Impairment. Dawg, Inc. uses a special piece of equipment to manufacture it's dog food made from pure alligator. The equipment was purchased in January 2013 for $8,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2014, new technology was introduced that would accelerate the obsolescence of the equipment. The company's accountant estimates that expected future net cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is $4,000,000. The company intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dawg, Inc. uses straight-line depreciation.

(a) What is the carrying value of the asset?
(b) Prepare the journal entry (if any) to record the impairment at December 31, 2014.
(c) Prepare any journal entries for the equipment at December 31, 2015. The fair value of the equipment at December 31, 2015, is estimated to be $4,600,000.
(d) Repeat the requirements for (b) and (c), assuming that Dawg, Inc. intends to dispose of the equipment and that it has not been disposed of as of December 31, 2015.

Answer 1

a) Carrying value = original value - accumulated depreciation

= $8,000,000 - $2,000,000

= $6.000,000

original value = $8,000,000

depreciation = purchase value - salvage value / useful life

= $8,000,000 - 0 / 8 = $1,000,000

depreciation for the 2013 = $1,000,000

depreciation for the 2014 = $1,000,000

accumulated depreciation =$2,000,000

b) Impairment loss is difference between carrying value and recoverable value

carrying value as calculated above

recoverable value is higher of fair value or present value of future cash flow

i.e., higher of $4,000,000 or $5,000,000

Impairment loss = $6,000,000 - $5,000,000

= $1,000,000

journal entry on December 31, 2014

DEBIT CREDIT

Impairment loss	$1,000,000
Accumulated impairment loss		$1,000,000

c) Carrying value of asset on December 31,2014 or January 1,2015

= original cost - accumulated depreciation - accumulated impairment loss

= $8,000,000 - $2,000,000 - $1,000,000

= $5,000,000

revised depreciation = present carrying value / remaining useful life

= $5,000,000 / 4

= $1,250,000

*   DEBIT CREDIT

Depreciation expense	$1,250,000
Accumulated depreciation		$1,250,000

Fair value = $4,6000,000

Present carrying value = $5,000,000 - $1,250,000

= $3,750,000

As fair value exceeds carrying value there is appreciation ( Reversal of impairment loss ) by $850,000.

* DEBIT CREDIT

Accumulated impairment loss	$850,000
Gain on value of equipment		$850,000

* all journal entries on December 31,2015

d) Actual sale did not take place an intention to dispose will not change the current position.

So, values calculated above remains unchanged.