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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

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