Question

Eckland Manufacturing Co. purchased equipment on January 1, 2009, at a cost of $90,000. Depreciation for 2009 and 2010 was based on an estimated ten-year life, $2,000 estimated residual value and Double decline balance depreciation method. On January 1, 2011, Eckland revised its estimate and now believes the equipment will have a remaining service life of eight years, $2,500 estimated residual value and sum-of-years ‘ digits (SYD) depreciation method .

On Dec 31 2011, Eckland reasonably estimated future cash flow that annual net cash inflow of previous three years will have $ 7,000 and remaining years will have $5,000. Also Eckland estimated the residual value $1,000.

• Additional information: Discount rate 6%, PV(3,6%)=0.84, PV(6,6%)=0.70,PV(7,6%)=0.66 PVA(3,6%)=2.67, PVA(4,6%)=3.47

Required:

Determine the amount of impairment loss, if any. If a loss is indicated, prepare the entry to record the loss under IFRS and USGAAP.

Answer 1

Computation of Depreciation for the year 2009 and 2010
Cost of equipment		$90,000
Residual value		$2,000
Depreciable value		$88,000
Useful life (in years)		10
Double decline depreciation = 2 * (Depreciable Value of asset/Useful life)
= 2 * ($ 88,000/10)
= 2 * $ 8,800
= $ 17,600
Depreciation for 2009			$17,600
Depreciation for 2010			$17,600
Total			$35,200
Carrying value of asset on Jan 1,2011
Cost of equipment				$90,000
Less: Depreciation for 2009 & 2010				$35,200
Carrying value of asset on Jan 1,2011				$54,800
Computation of depreciation as per revised estimates
Carrying value of equipment				$54,800
Residual value				$2,500
Depreciable value				$52,300
Useful life (in years)				8
Sum of the digits depreciation
SYD = n*(n+1)/2 where n = useful life
= (8 * (8+1))/2
= (8 * 9)/2
=72/2
=36
Depreciation fraction for year 1 = 8/36
Depreciation for the year 2011 = Depreciable Value * Depreciable fraction
= $ 52300 * 8/36
= $ 418,400/36
= $ 11,622 (rounded off $ 11,622.22)
Carrying value of equipment as on Dec 31,2011
Cost of equipment					$52,800
Less: Depreciation for the year					$11,622
Carrying value of equipment as on Dec 31,2011					$41,178
Computation of the present value of equipment on the basis of estimated
future cash flows
Cash flow for year 1 to 3				$7,000.00
Cash flow for year 4 to 8				$5,000.00
Residual value				$1,000.00
Discount rate				6%
Computation of present value of cash flows
Year	Cash Inflow		PVA @ 6%	PV @ 6% PV = 1/(1.06)^n		PV of Cash flow
				Formula	Value
1-3	$7,000		2.67			$18,690
4	$5,000		0	1/(1.06)^4	0.79	$3,950
5	$5,000		0	1/(1.06)^5	0.75	$3,750
6	$5,000		0	1/(1.06)^6	0.70	$3,500
7	$5,000		0	1/(1.06)^7	0.67	$3,350
8	$5,000		0	1/(1.06)^8	0.63	$3,150
8	$1,000		0	1/(1.06)^8	0.63	$630
	PV of cash flow					$37,020
Fair value of the equipment on the basis estimated cash flow						$37,020.00
Carrying value of equipment as on Dec 31,2011						$41,178
Fair value of equipment as on Dec 31,2011						$37,020
Since,the fair value is less than carrying value of the equipment,there is an
impairmnent loss
Impairment loss = Carrying Cost of asset - Fair Value of asset
= $ 41,178 - $ 37,020
= $ 4,158
Journal entry for impairment loss of asset
under USGAAP, the impairment loss once recorded is not reversible
Account Title and Explanation				Debit	Credit
Loss on Impairment				$4,158.00
Equipment					$4,158.00
(being the impairment loss recorded directly against the carrying
value of the equipment creating a new cost of the asset to be
depreciated over its remaining useful life)
under IFRS,impairment loss is reversible if there are subsequent
changes in the fair value of the asset
Account Title and Explanation				Debit	Credit
Loss on Impairment				$4,158.00
Goodwill					$4,158.00
(being the impairment loss recorded against in a contra account to
the asset and the new cost of asset to be depreciated over its
remaining useful life)

Note - Since, the PV factors for all the years were not available in the additional information,we have used the PV factor formula to derive them.