Question

Presented below is information related to equipment owned by a company at December 31, 2017.

            Cost                                                                                                $5,600,000

            Accumulated depreciation to date                                                640,000

            Expected future net cash flows                                                4,000,000

            Fair value                                                                                      2,720,000

Assume that the company will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.

Using the attached T-account template:

Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.

Prepare the journal entry to record depreciation expense for 2018.

If the fair value of the equipment at December 31, 2018 is $4,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Answer 1

a.

Date	General Journal	Debit	Credit
Dec 31, 2017	Loss on Impairment
	Accumulated Depreciation—Equipment

Explanation:

Note: The asset fails the recoverability test ($4,000,000 < $8,000,000)

Cost	$5600000
Accumulated Depreciation	(640000)
Carrying Amount	4960000
Fair Value	(2720000)
Loss on impairment	$2240000

b.

Date	General Journal	Debit	Credit
Dec 31, 2018	Depreciation Expense	680000
	Accumulated Depreciation—Equipment		680000

Explanation:

New carrying amount                  $2720000

Useful life                                         4 years

Depreciation per year               $680000

c. No entry necessary. Restoration of any impairment loss is not permitted if the asset is held for use.