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Chapter 11: Q12IFRS (page 608)

Assume the same information as in IFRS11-11, except that Pujols intends to dispose of the equipment in the coming year.

Cost (residual value \(0)

\)9,000,000

Accumulated depreciation to date

1,000,000

Value-in-use

5,500,000

Fair value less cost of disposal

4,400,000

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry (if any) to record depreciation expense for 2018.
  3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,100,000. Prepare the journal entry (if any) necessary to record this increase. It is expected that the cost of disposal is \)20,000.

Short Answer

Expert verified
  1. Loss on impairment is $3,600,000.
  2. There will be no journal entry to record depreciation expense for 2018.
  3. Recovery of the impairment loss is $680,000.

Step by step solution

01

Meaning of Impairment

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 a business's financial statements above the maximum amount that could be recouped through its sale.

02

(a) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2017

Loss on Impairment

3,600,000

Accumulated Depreciation

Equipment

3,600,000

Working Notes:

Calculation of the loss on impairment:

Cost

$9,000,000

Less: Accumulated depreciation

1,000,000

Carrying amount

8,000,000

Less: Fair value less the cost of disposal

4,400,000

Loss on impairment

$3,600,000

03

(b) Explaining journal entry

Depreciation is not taken on assets intended to be sold. So, there is no need to pass any journal entry to record the depreciation expense for 2018.

04

(c) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2018

Accumulated Depreciation-Equipment

680,000

Recovery of Impairment Loss

680,000

Working Notes:

Calculation of the recovery of impairment loss:

Fair value

$5,100,000

Less: Costs of disposal

20,000

5,080,000

Less: Carrying amount

4,400,000

Recovery of loss on impairment

$680,000

Calculation of the carrying amount:

Carrying amount = Cost - Accumulated depreciation - Loss on Impairment

= $9,000,000 - $1,000,000 - $3,600,000

= $4,400,000

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Most popular questions from this chapter

Silverman Company purchased machinery for \(162,000 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of \)15,000, production of 84,000 units, and working hours of 42,000. During 2017, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years’-digits, and double-declining-balance methods.

Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years. (a) Compute 2017 depreciation expense using the straight-line method. (b) Compute 2017 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2017.

(Depreciation Computations—Five Methods, Partial Periods) Muggsy Bogues Company purchased equipment for \(212,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of \)12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2017, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.

Instructions

Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.

  1. Straight-line method for 2017.
  2. Activity method (units of output) for 2017.
  3. Activity method (working hours) for 2017.
  4. Sum-of-the-years’-digits method for 2019.
  5. Double-declining-balance method for 2018.

Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.

Presented below is information related to equipment owned by Pujols Company at December 31, 2017.

Cost (residual value \(0)

\)9,000,000

Accumulated depreciation to date

1,000,000

Value-in-use

5,500,000

Fair value less cost of disposal

4,400,000

Assume that Pujols will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry to record depreciation expense for 2018.
  3. The recoverable amount of the equipment at December 31, 2018, is $6,050,000. Prepare the journal entry (if any) necessary to record this increase.
See all solutions

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