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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 11, Problem 11P
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Solutions

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Section
Problem 1GI
Problem 2GI
Problem 3GI
Problem 4GI
Problem 5GI
Problem 6GI
Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
Problem 12GI
Problem 13GI
Problem 14GI
Problem 15GI
Problem 16GI
Problem 17GI
Problem 18GI
Problem 19GI
Problem 20GI
Problem 21GI
Problem 22GI
Problem 23GI
Problem 1MC
Problem 2MC
Problem 3MC
Problem 4MC
Problem 5MC
Problem 6MC
Problem 7MC
Problem 8MC
Problem 9MC
Problem 10MC
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Problem 2RE
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Problem 5RE
Problem 6RE
Problem 7RE
Problem 8RE
Problem 9RE
Problem 10RE
Problem 11RE
Problem 12RE
Problem 13RE
Problem 14RE
Problem 1E
Problem 2E
Problem 3E
Problem 4E
Problem 5E
Problem 6E
Problem 7E
Problem 8E
Problem 9E
Problem 10E
Problem 11E
Problem 12E
Problem 13E
Problem 14E
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Problem 18E
Problem 19E
Problem 20E
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 19P
Problem 20P
Problem 21P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
Problem 6C
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
89 views

On January 1, 2014, Borstad Company purchased equipment for $1,180,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $400,000 and will incur cash outflows of $295,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstad’s discount rate is 12%.

Required:

  1. 1. Prepare schedules to determine whether, at the end of 2019, the equipment is impaired and, if so, the impairment loss to be recognized.
  2. 2. Prepare the journal entry to record the impairment.
  3. 3. Next Level How would your answer to Requirement 1 change if the discount rate was 16% and the cash flows were expected to continue for 6 years?
  4. 4. Next Level How would your answer change if management planned to implement efficiencies that would save $10,000 each year?
  5. 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $570,000 and estimates that it would cost $17,000 to sell the equipment. How much would the company recognize as the impairment loss?

1.

To determine

State whether the impairment loss would recognize or not, and calculate the impairment loss of equipment at the end of 2019.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Impairment loss of assets:

Impairment loss of assets arises when the carrying value of the assets recorded on the balance sheet of the company exceeds its fair market value.

In this case, the expected net cash flow ($840,000(4)) is less than the book value of asset ($896,800 (2)); hence the equipment would be impaired and the impairment loss is recognized.

Calculate the impairment loss of equipment at the end of 2019 as follows:

Impairment loss = Fair value −Book value=$521,602 (5)−$896,800 (2)=$(375,189)

Working note (1):

Calculate the accumulated depreciation for the equipment.

Accumulated depreciation = Annual depreciation ×Number of years=$47,200×6 years=$283,200

Working note (2):

Calculate the book value of assets.

Book value = Cost of equipment −Accumulated depreciation=$1,180,000−$283,200=$896,800

Working note (3):

Calculate the undiscounted expected net cash flows per year

2.

To determine

Prepare the journal entry to record the impairment loss.

3.

To determine

Calculate the impairment loss of equipment at 16% discount rate.

4.

To determine

Explain whether the company would recognize impairment loss or not if management planned to save $10,000 each year.

5.

To determine

Calculate the impairment loss of Company B, and assume that the company uses IFRS.

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Ch-11 P-11GICh-11 P-12GICh-11 P-13GICh-11 P-14GICh-11 P-15GICh-11 P-16GICh-11 P-17GICh-11 P-18GICh-11 P-19GICh-11 P-20GICh-11 P-21GICh-11 P-22GICh-11 P-23GICh-11 P-1MCCh-11 P-2MCCh-11 P-3MCCh-11 P-4MCCh-11 P-5MCCh-11 P-6MCCh-11 P-7MCCh-11 P-8MCCh-11 P-9MCCh-11 P-10MCCh-11 P-1RECh-11 P-2RECh-11 P-3RECh-11 P-4RECh-11 P-5RECh-11 P-6RECh-11 P-7RECh-11 P-8RECh-11 P-9RECh-11 P-10RECh-11 P-11RECh-11 P-12RECh-11 P-13RECh-11 P-14RECh-11 P-1ECh-11 P-2ECh-11 P-3ECh-11 P-4ECh-11 P-5ECh-11 P-6ECh-11 P-7ECh-11 P-8ECh-11 P-9ECh-11 P-10ECh-11 P-11ECh-11 P-12ECh-11 P-13ECh-11 P-14ECh-11 P-15ECh-11 P-16ECh-11 P-17ECh-11 P-18ECh-11 P-19ECh-11 P-20ECh-11 P-1PCh-11 P-2PCh-11 P-3PCh-11 P-4PCh-11 P-5PCh-11 P-6PCh-11 P-7PCh-11 P-8PCh-11 P-9PCh-11 P-10PCh-11 P-11PCh-11 P-12PCh-11 P-13PCh-11 P-14PCh-11 P-15PCh-11 P-16PCh-11 P-17PCh-11 P-18PCh-11 P-19PCh-11 P-20PCh-11 P-21PCh-11 P-1CCh-11 P-2CCh-11 P-3CCh-11 P-4CCh-11 P-5CCh-11 P-6C

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