On July 1, 2012, Okin Company purchased equipment for $280,000; the estimated useful life was 10...

On July 1, 2012, Okin Company purchased equipment for $280,000; the estimated useful life was 10 years and the expected salvage value was $25,000. Straight-line depreciation is used. On July 1, 2016, economic factors cause the market value of the equipment to decrease to $90,000. On this date, Okin evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be $125,000.

a. Is the equipment impaired at July 1, 2016?

b. If the equipment is impaired at July 1, 2016, calculate the amount of the impairment loss.
Impairment loss = $

c. If the equipment is impaired at July 1, 2016, prepare the journal entry to record the impairment loss.

Solutions

Expert Solution

a) Annual depreciation for the Equipment = (Cost - Salvege value)/Useful Life

= ($280,000 - $25,000)/10 yrs = $25,500

Total Depreciation charged upto July 1, 2016 = $25,500*4 yrs = $102,000 (from july 1, 2012 to july 1, 2016)

Carrying Value on July 1, 2016 = Cost - Depreciation charged

= $280,000 - $102,000 = $178,000

Fair Value of Equipment = $90,000

Value in use = $125,000

Recoverable Amount = Higher of Fair Value or Value in use (higher of $90,000 or $125,000 i.e. $125,000)

As the recoverable amount of machine of $125,000 is less than carrying value of $178,000, the equipment will be impaired at July 1, 2016.

b) Impairment Loss = Carrying Value - Recoverable Amount

= $178,000 - $125,000 = $53,000

c) Journal Entry (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
July 1, 2016	Impairment Loss	53,000
	Accumulated Depreciation and impairment losses		53,000
	(To record the impairment loss)

ekkarill92 answered 10 months ago

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