Question

Reveille, Inc uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $6,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2020, new technology was introduced that would accelerate the obsolescence of Reveille’s equipment. Reveille’s controller estimates that expected future net cash flows on the equipment will be $3,750,000 and that the fair value of the equipment is $3,300,000. Reveille intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Reveille uses straight-line depreciation.

Instructions: please show work

a What is the carrying value of the asset?

b Prepare the journal entry (if any) to record the impairment at December 31, 2020.

c Prepare any journal entries for the equipment at December 31, 2021. The fair value of the equipment at December 31, 2021, is estimated to be $3,450,000.

Answer 1

a)

Cost of equipment	$       60,00,000
Useful life	8 years
Depreciation for 2019 &2020 (6000000/8*2)	$       15,00,000
Carrying amount as at December 31,2020	$       45,00,000

b)
Impairment loss is recognized when recoverable amount is less than carrying amount of asset.

Recoverable amount is highest of future net cash flows and fair value of asset.

Carrying amount as at December 31,2020		$ 45,00,000
Recoverable amount:
Highest of;
Future net cash flows	$ 37,50,000
Fair value	$ 33,00,000
		$ 37,50,000
Impairment loss (4500000-3750000)		$   7,50,000

Impairment loss	$ 7,50,000
Equipment		$ 7,50,000

c)

Carrying amount January 1,2021	$ 37,50,000
Revised life	4 years
Depreciation (3750000/4)	$   9,37,500
Carrying amount December 31,2021	$ 28,12,500

Depreciation expense	$ 9,37,500
Accumulated depreciation		$ 9,37,500
(To record depreciation expense)

Fair value	$ 34,50,000
Carrying amount December 31,2021	$ 28,12,500
Impairment loss reversal	$   6,37,500

Equipment	$ 6,37,500
Impairment reversal		$ 6,37,500
(Reversal of impairment loss)