In: Accounting
On January 1, 2018, Blossom Ltd. purchased equipment for $808,000. The equipment was assumed to have an 8-year useful life and no residual value, and was to be depreciated using the straight-line method. On January 1, 2020, Blossom's management became concerned that the equipment may have become obsolete. Management calculated that the undiscounted future net cash flows from the equipment was $580,750, the discounted future net cash flows was $515,100, and the current fair value of the equipment (after costs to sell) was $505,000.
1. Assuming that Blossom is a private Canadian company following ASPE, and uses the cost recovery impairment model. Record the journal entry to record the impairment loss, if any
2. Assuming that Blossom is a public Canadian company, and uses the rational entity impairment model. Record the journal entry to record the impairment loss, if any
Cost of equipment | $ 8,08,000 |
Useful life | 8 years |
Used till date | 2 years |
Depreciation for 2 years (808000/8*2) | $ 2,02,000 |
Book value | $ 6,06,000 |
1)
Impairment loss should be recorded when carrying amount is more than recoverable amount
Under ASPE, recoverable amount is undiscounted future cash flows
Carrying amount | $ 6,06,000 | |
Recoverable amount | $ 5,80,750 | |
Impairment loss | $ 25,250 | |
Impairment loss | $ 6,06,000 | |
Accumulated impairment losses- Equipment | $ 6,06,000 |
2)
Impairment loss should be recorded when carrying amount is more than recoverable amount
Recoverable amount is higher of discounted cash flows and fair value less cost to sell.
Recoverable amount: | |
Higher of | |
Discounted net future cash flows | $ 5,15,100 |
Fair value less cost to sell | $ 5,05,000 |
Recoverable amount | $ 5,15,100 |
Carrying amount | $ 6,06,000 |
Recoverable amount | $ 5,15,100 |
Impairment loss | $ 90,900 |
Impairment loss | $ 90,900 | |
Equipment | $ 90,900 |