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Sparky, Inc. presented the following select balance sheet accounts for Plant, Property & Equipment as well...

Sparky, Inc. presented the following select balance sheet accounts for Plant, Property & Equipment as well as Intangibles as of December 31, 2018:

Plant, Property & Equipment:
Equipment-FJ400Z (net of Accumulated Depreciation)	$ 319,200

Intangibles:
Patent – FJ190X (net of Accumulated Amortization)	$ 162,000

The following information was reported in Sparky’s 10K filing as of December 31, 2018:

The equipment was purchased for $420,000 on October 1, 2017. It has an expected service life of 10 years and $32,000 salvage value. Sparky uses the Double-Declining Balance method for this class of asset.

The patent was acquired on January 1, 2018 and at that time had an estimated remaining useful life of 10 years.

During 2019, the following transactions and events may have affected Sparky’s long-lived assets:

July 1

Paid $68,000 in legal fees that resulted in the successful defense of Patent-FJ10-X. This event changed the estimated remaining useful life to five years from July 1, 2019.

Aug 1

Sparky paid $2,170,000 to acquire Medifast, a small start-up company, which became a division of Sparky. Medifast reported the following book values and fair values for their balance sheet at the time of acquisition:

Book Value Fair Value

Cash $ 36,000 $ 36,000

Receivables 100,437 100,400

Plant & Equip (net) 640,275 654,200

Patents (remaining life 16 yrs) 60,000 854,000

Trademarks 14,652 187,450

Payables 58,900 58,900

*Sparky intends to continuously renew the trademark registration.

Dec 31

At year-end, after recording the appropriate depreciation on Equipment-FJ400Z, Sparky determined it was necessary to perform an impairment test due to rapid changes in demand for the one and only product this piece of equipment produces. Sparky estimated the future net cash flows of the equipment to be $65,000 per year for the next three years. Sparky intends to continue using the equipment and evaluates PP&E using a discount rate of 15%. (PV of $1, 15%, 3n is .657 and PVOA, 15%, 3n is 2.625)

Using the above information, answer each of the following questions:

a.

Determine the amount of the Impairment Loss (if any) Sparky would report for the Equipment as of December 31, 2019:

b.Assume that early in 2020, Sparky determined that the equipment will only remain productive through December 31, 2021 and changed to the straight-line method for this asset. The salvage value was determined to be $10,075. Determine Depreciation Expense (if any) Sparky would record for this equipment as of December 31, 2020:

Expert Solution

Question 1

Impairment Loss can be computed as Carrying Cost - Recoverable Amount.

In the Above case, the Carrying cost of Equipment-FJ400Z is $319,200 - Depreciation for 2019.

Depreciation Rate = 1/10 years = 10%

Under Double Declining Method Deprecition for 2019 would be:

Opening Net Book Value X(Depreciation % X 2) = 319,200 X 10% X 2 = 63,860

Hence the Carrying value as at 31 Dec 2019 = 319,200 - 63,860 = $255,360

The recoverable amount is the computed as the present value fot he future cash flows from the asset.

Assuming that the asset generates $65,000 for 3 years and it does not generate any other income and as a result the Company sells it for the salvage value of $32,000, the following is the present value of the cash flows:

65000 X 2.625 + 32000 X 0.657 = $191,666.

This would result in an impairment loss of $255,360 - $191,666 = 63,694.5

Question 2

Impairment is Passed

The carrying Value of the asset as on 31 Dec 2019 would be $191,666 (Impairment is not made).

The new useful life is only 2 years at this point.

Hence the Depreciation for 31 December 2020 would be (191,666-32,000)/2 = $79,832

Impairment not Passed

The carrying Value of the asset as on 31 Dec 2019 would be $255,360 (Impairment is not made).

The new useful life is only 2 years at this point.

Hence the Depreciation for 31 December 2020 would be (255,360-32,000)/2 = 111,680

ekkarill92 answered 1 year ago

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