Carli\'sCarli\'s Domino Manufacturing Company learned that one of its cutting ma
ID: 2334402 • Letter: C
Question
Carli'sCarli's
Domino Manufacturing Company learned that one of its cutting machines is obsolete. Although the company will continue to use this machinery in the future, management believes that an impairment write-down is required. The following information relates to the cutting machine:
The firm estimates that the machine has a useful life of 10 years and it has used it for four years. It has no salvage value.
Cost = $3,218,000
Accumulated Depreciation (up to the date of the impairment test) = $1,285,000
Total Estimated future cash flows = $1,234,000
Total Discounted future cash flows = $1,063,000
Estimated Fair Value = $1,044,000
Costs to sell = $8,000
Remaining Useful Life From the Impairment Date = 6 years
Requirements:
a.
Prepare the journal entry required to record the impairment loss.
b.
Assuming that Carli's uses the straight-line method with no residual value, prepare the journal entry to record the revised depreciation expense for the first year immediately following the impairment.
c.
Assume that two years following the impairment write-down, the fair value of the asset falls to $729,000. The sum of the undiscounted future cash flows is $753,000. What is the carrying value of the asset at this time? Prepare any journal entry necessary to reflect the change in fair value.
a.
Prepare the journal entry required to record the impairment loss.
b.
Assuming that Carli's uses the straight-line method with no residual value, prepare the journal entry to record the revised depreciation expense for the first year immediately following the impairment.
c.
Assume that two years following the impairment write-down, the fair value of the asset falls to $729,000. The sum of the undiscounted future cash flows is $753,000. What is the carrying value of the asset at this time? Prepare any journal entry necessary to reflect the change in fair value.
Explanation / Answer
a Computation of Assets Recoverable asset is as follows Assets Recoverable amount shall be greater of following 1 Estimated fair value less costs to sell asset have been given as ($1044000-$8000) $1,036,000 2 Present Value of benefits for corporation is given as $1063000 If the group assets recoverable amount is less than carrying amount of group of assets then there is need to compute the impairement loss of asset otherwise there is no need to compute impairment loss In the given case it is seen that Assets Recoverable amount $1036000 is less than the carrying value ($3218000-$1285000) $1,933,000 computation of impairment loss Impairment loss Carrying Value of asset -Recoverable Asset Value $1933000-$1063000 $870,000 Thus the impairment loss is $870000 The Journal Entry Date Account Title Dr Amount Cr Amount Impairment Loss $870,000 Accumulated Depreciation $1,285,000 To Asset value $2,155,000 The asset is impaired b It has been required to compute the revised depreciation following the yr of impairment Revised Depreciation NBV -Salvage Value/Remaining Life of Asset $19330000-0/6 $322,167 Journal Entry Date Account Title Dr Amount Cr Amount Depreciation $322,167 To Accumulated Depreciation $322,167 the asset is impaired c It has been given that the two years following the impairment write down the fair value has fallen to $729000 and the value of the undiscounted cash flow has fallen to $753000 Computation of Net carrying value Net BV of two years following impairment $1,933,000 Accumulated Depreciation for two yrs $322167*2 $644,334 Net carrying Value $1,288,666 In the given case it is found that the net carrying value is more than the estimated fair value. In the given case it has been found that the asset is held for purpose of use and and as per USGAAP there should be no reversal of impairment loss which have been recognised earlier. Hence there shall be no reversal of impairment loss and no recording of change in fair value as the asset is held for purpose of usage for business operations.