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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, 2015, Vallahara Company purchased machinery for $650,000, which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of $50,000. Late in 2019, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of 5 years, over which it estimates the asset will produce total cash inflows of $1,000,000 and will incur total cash outflows of $825,000. The cash flows are independent of the company’s other activities and will occur evenly each year. Vallahara is not able to determine the fair value based on a current selling price of the machinery. Vallahara’s discount rate is 10%.

Required:

  1. 1. Prepare schedules to determine whether, at the end of 2019, the machinery is impaired and, if so, the impairment loss to be recognized.
  2. 2. If the machinery is impaired, prepare the journal entry to record the impairment.
  3. 3. If Vallahara uses IFRS and determines that the fair value of the machinery is $200,000 and that it would cost $10,000 to sell the machine, how much would the company recognize as the impairment loss?
  4. 4. Assuming that the recoverable amount of the machinery is determined to be $220,000 at the end of 2020, what entry will Vallahara make to record this increase in value under U.S. GAAP? Under IFRS?

1.

To determine

State whether the impairment loss is recognized or not, and if it is recognized, calculate the impairment loss of machinery 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 ($175,000(4)) is less than the book value of asset ($400,000 (2)); hence the machine would be impaired and the impairment loss is recognized.

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

Impairment loss = Fair value Book value=$132,678 (5)$400,000(2)=$(267,322)

Working note (1):

Calculate the accumulated depreciation for the machinery.

Accumulated depreciation = Annual depreciation ×Number of years=$50,000×5 years=$250,000

Working note (2):

Calculate the book value of assets.

Book value = Cost of equipment Accumulated depreciation=$650,000$250,000(1)=$400,000

Working note (3):

Calculate the undiscounted expected net cash flows per year

2.

To determine

Prepare journal entry to record the impairment loss.

3.

To determine

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

4.

To determine

State the necessary entry that the company would make under U.S. GAAP, and IFRS.

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