Question

In: Accounting

On January 1, 2018, Blossom Ltd. purchased equipment for $808,000. The equipment was assumed to have...

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

Solutions

Expert Solution

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

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