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Chapter 11: Q11-8BE (page 594)

Jurassic Company owns equipment that cost \(900,000 and has accumulated depreciation of \)380,000. The expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.

Short Answer

Expert verified

Answer

Impairment loss = $120,000

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Impairment

The term "impairment" refers to a reduction of the market value of fixed or intangible assets, indicative of a reduction in the quantity, quality, or market value of an asset. The idea is that an asset should never be reported in your business's financial statements above the maximum amount that could be recouped through its sale.

02

Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Loss on Impairment

120,000

Accumulated Depreciation

Equipment

120,000

Working notes:

Calculating accumulated depreciation

Accumulated depreciation=Equipment cost−Accumulated depreciation−Fair value=$900,000−$380,000−$400,000=$520,000−$400,000=$120,000

Note:Recoverability test

Future net cash flows ($500,000) are less than the Carrying amount ($520,000); therefore, the asset has been impaired.

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Most popular questions from this chapter

Tanaka Company has land that cost \(15,000,000. Its fair value on December 31, 2017, is \)20,000,000. Tanaka chooses the revaluation model to report its land. Explain how the land and its related valuation should be reported.

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Instructions

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