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Chapter 11: Q17E (page 588)


(Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be \(20,000.

Cost

\)9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

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 \(5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still \)20,000.

Short Answer

Expert verified

Answer

  1. Loss on impairment = $3,220,000
  2. No entry required
  3. Recovery of loss on impairment = $500,000

Step by step solution

01

Meaning of Impairment 

A permanent loss in value of an asset is considered an impairment. This can be a result of permanent damage or technical problems that impede it from delivering the performance it used to deliver.

02

(a) Preparing journal entries

Date

Particular

Debit ($)

Credit ($)

Loss on Impairment

3,220,000

Accumulated Depreciation

Equipment

3,220,000

Working notes:

Calculating the amount of loss on impairment

Cost

$9,000,000

Accumulated depreciation

1,000,000

Carrying amount

8,000,000

Less: Fair value

4,800,000

Plus: Cost of disposal

20,000

Loss on impairment

$3,220,000

03

(b) Explaining the journal entry

Depreciation is not taken on assets intended to be sold. Therefore no entry should be passed.

If the assesses sells, destroys, or demolishes the asset in the same year that it was purchased, they cannot claim the deduction.

04

(c) Preparing journal entry 

Date

Particular

Debit ($)

Credit ($)

Accumulated Depreciation-Equipment

500,000

Recovery of Loss from Impairment

500,000

Working notes:

Calculation of recovery of impairment loss

Fair value $5,300,000

Less: Cost of disposal 20,000

$5,280,000

Less: Carrying amount

4,780,000

Recovery of loss on impairment

$ 500,000

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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.

(Unit, Group, and Composite Depreciation) The certified public accountant is frequently called upon by management for advice regarding methods of computing depreciation. Of comparable importance, although it arises less frequently, is the question of whether the depreciation method should be based on consideration of the assets as units, as a group, or as having a composite life.

Instructions

  1. Briefly describe the depreciation methods based on treating assets as

(1) units and

(2) a group or as having a composite life.

  1. Present the arguments for and against the use of each of the two methods.
  2. Describe how retirements are recorded under each of the two methods.

(Impairment) Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for \(10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Roland’s equipment. Roland’s controller estimates that expected future net cash flows on the equipment will be \)6,300,000 and that the fair value of the equipment is \(5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation.

Instructions

  1. Prepare the journal entry (if any) to record the impairment at December 31, 2017.
  2. Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be \)5,900,000.
  3. Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.

(Depletion and Depreciation—Mining) Khamsah Mining Company has purchased a tract of mineral land for \(900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of \)30,000.

The company builds necessary structures and sheds on the site at a cost of \(36,000. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of \)60,000. This machinery cost the former owner $150,000 and was 50% depreciated when purchased. Khamsah Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.

Instructions

  1. As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for each year of the expected life of the mine.
  2. Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.

(Depletion Computations—Mining) Alcide Mining Company purchased land on February 1, 2017, at a cost of \(1,190,000. It is estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at \)90,000. It believes it will be able to sell the property afterwards for \(100,000. It incurred developmental costs of \)200,000 before it was able to do any mining. In 2017, resources removed totaled 30,000 tons. The company sold 22,000 tons.

Instructions

Compute the following information for 2017.

  1. Per unit material cost.
  2. Total material cost of December 31, 2017, inventory.
  3. Total material cost in cost of goods sold at December 31, 2017.
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