Question

Carli'sCarli's

Domino Manufacturing Company learned that one of its cutting machines is obsolete. Although the company will continue to use this machinery in the​ future, management believes that an impairment​ write-down is required. The following information relates to the cutting​ machine:

The firm estimates that the machine has a useful life of 10 years and it has used it for four years. It has no salvage value.

Cost = $3,218,000

Accumulated Depreciation (up to the date of the impairment test) = $1,285,000

Total Estimated future cash flows = $1,234,000

Total Discounted future cash flows = $1,063,000

Estimated Fair Value = $1,044,000

Costs to sell = $8,000

Remaining Useful Life From the Impairment Date = 6 years

Requirements:

a.	Prepare the journal entry required to record the impairment loss.
b.	Assuming that Carli's uses the​ straight-line method with no residual​ value, prepare the journal entry to record the revised depreciation expense for the first year immediately following the impairment.
c.	Assume that two years following the impairment​ write-down, the fair value of the asset falls to $729,000. The sum of the undiscounted future cash flows is $753,000. What is the carrying value of the asset at this​ time? Prepare any journal entry necessary to reflect the change in fair value.

Answer 1

a	Computation of Assets Recoverable asset is as follows
	Assets Recoverable amount shall be greater of following
	1	Estimated fair value less costs to sell asset have been given as
		($1044000-$8000)
		$1,036,000
	2	Present Value of benefits for corporation is given as $1063000
		If the group assets recoverable amount is less than carrying amount
		of group of assets then there is need to compute the impairement loss
		of asset otherwise there is no need to compute impairment loss
		In the given case it is seen that Assets Recoverable amount $1036000
		is less than the carrying value ($3218000-$1285000)
		$1,933,000
		computation of impairment loss
		Impairment loss	Carrying Value of asset -Recoverable Asset Value
			$1933000-$1063000
			$870,000
		Thus the impairment loss is $870000
		The Journal Entry
		Date	Account Title	Dr Amount	Cr Amount
			Impairment Loss	$870,000
			Accumulated Depreciation	$1,285,000
			To Asset value		$2,155,000
			The asset is impaired
	b	It has been required to compute the revised depreciation following the yr of impairment
		Revised Depreciation	NBV -Salvage Value/Remaining Life of Asset
			$19330000-0/6
			$322,167
		Journal Entry
		Date	Account Title	Dr Amount	Cr Amount
			Depreciation	$322,167
			To Accumulated Depreciation		$322,167
			the asset is impaired
	c	It has been given that the two years following the impairment write down the fair value
		has fallen to $729000 and the value of the undiscounted cash flow has fallen to $753000
		Computation of Net carrying value
		Net BV of two years following impairment	$1,933,000
		Accumulated Depreciation
		for two yrs
		$322167*2	$644,334
		Net carrying Value	$1,288,666
		In the given case it is found that the net carrying value is more than the estimated fair
		value.
		In the given case it has been found that the asset is held for purpose of use and and as per USGAAP
		there should be no reversal of impairment loss which have been recognised earlier.
		Hence there shall be no reversal of impairment loss and no recording of change in fair value as the asset is
		held for purpose of usage for business operations.