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Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January...

Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2015 for $8,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2016, new technology was introduced that would accelerate the obsolescence of Dolphin’s equipment. Dolphin’s controller estimates that expected future net cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is $4,400,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years (still no salvage value. Dolphin uses straight-line depreciation. Instructions (a) What is the carrying value of the asset on December 31, 2016? (b) Do the 2 impairment tests to determine if the asset is impaired. If so, record the impairment (c) What is the new carrying value of the asset? (d) Write the depreciation entry for Dec 31, 2017.

Expert Solution

(a) The cost of equipment = $8,000,000

Estimated useful life = 8 years

Accumulated depreciation for 2 years(January 2015 to December 2016) = $8,000,000/8*2 = $2,000,000

Carrying value of the equipment on 31st December, 2016 = $8,000,000-$2,000,000 = $6,000,000

(b) For impairment test we have to first determine the recoverable amount of the equipment.

Here, Fair value of the equipment = $4,400,000

Expected future net cash flows on the equipment = $5,000,000

Recoverable amount equals the higher of fair value and expected future net cash flows of the equipment.

So, Recoverable amount is $5,000,000

Now the carrying amount is $6,000,000 while recoverable amount is $5,000,000, So. the asset is impaired and an impairment loss of $1,000,000($6,000,000-$5,000,000) is to be recognized. The journal entry would be

Impairment Loss A/c Dr. $1,000,000

To Accumulated Impairment Losses A/c $1,000,000

(c) New carrying value would be = $5,000,000

(d) Depreciation entry for Dec31, 2017

Depreciation A/c Dr $125,000

To Accumulated Depreciation A/c $125,000

ekkarill92 answered 1 year ago

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