Question
In: Accounting
On January 1, 2011, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over...
On January 1, 2011, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2016, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $450,000 and will incur cash outflows of $342,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstad’s discount rate is 14%.
| Required: | |
| 1. | Prepare schedules to determine whether, at the end of 2016, the equipment is impaired and, if so, the impairment loss to be recognized. Enter the Accumulated Depreciation amount as a negative number. |
| 2. | Prepare the journal entry to record the impairment. |
| 3. | Next Level How would your answer to Requirement 1 change if the discount rate was 18% and the cash flows were expected to continue for 6 years? |
| 4. | Next Level How would your answer change if management planned to implement efficiencies that would save $11,000 each year? |
| 5. | Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $549,000 and estimates that it would cost $19,000 to sell the equipment. How much would the company recognize as the impairment loss? |
Solutions
Expert Solution
Answer to question 1
Answer to Question 2
Answer to Question 3
Re-calculation of cash flow using discount rate of 18% and cash flow period of 6 years, the calculation for cash flows and impairment loss is shown as follows:
Answer to Question 4
If the management planned effeciencies which would result in savings of 11,000, the impairment loss will reduce as cash flows will increase. Assuming the calculation base using a discount rate 18% and period 6 years, the recalculated amount is as follows:
5. If the fair value of machine is 549,000 and cost to sell are 19,000, it would mean that the total recoverable value of the machine would be considered to be 530,000 (549,000-19,000). Recoverable value is higher of the "fair value less cost to sell" and "value in use", i.e. present value of cash flows. Value in use calculated above is USD 500,997. FV less cost to sell is USD 530,000. Therefore, recoverable value will be USD 530,000, i.e. higher of the two. Impairment loss will be (920,000-530,000) 390,000
ekkarill92 answered 1 year agoRelated Solutions
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