Blossom Company uses special plastic wrapping equipment in its shipping business
ID: 2518220 • Letter: B
Question
Blossom Company uses special plastic wrapping equipment in its shipping business. The equipment was purchased in January 2016 for $4,800,000 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 Blossom’s equipment. Blossom’s controller estimates that expected future net cash flows on the equipment will be $3,360,000 and that the fair value of the equipment is $2,880,000. Blossom intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Blossom uses straight-line depreciation.
Account Titles and Explanation
Debit
Credit
Account Titles and Explanation
Debit
Credit
Date
Account Titles and Explanation
Debit
Credit
12/31/17
12/31/18
Blossom Company uses special plastic wrapping equipment in its shipping business. The equipment was purchased in January 2016 for $4,800,000 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 Blossom’s equipment. Blossom’s controller estimates that expected future net cash flows on the equipment will be $3,360,000 and that the fair value of the equipment is $2,880,000. Blossom intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Blossom uses straight-line depreciation.
Explanation / Answer
Ans
The following information is given
As per straight line method the per year depreciation will be
= book value of equipment / no of estimated useful life
= $4,800,000 / 8
=$600,000
The net asset value as on 31 december 2017 will be as under
The net equipment value will be as under
= book value of equipment- depreciation for 2 years
= $4,800,000 – $1,200,000
=$3,600,000
The net asset value of equipment as on 31 December, 2017 is $3,600,000
To calculate impairment loss as on 31 December, 2017 following information is taken
The test of recoverability test for impairment is when sum of future cash flows is less thje carrying value of asset then impairment entry is done which is as below
The calculation of impairment loss
= Net asset value – fair value of asset
= $ 3,600,000 - $2,880,000
=$720,000
The journal entry will be to record the impairment at December 31, 2017.
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
31 dec,2017
Impairment loss
720,000
Accumulated depreciation-equipment
720,000
( to record impairment loss as on 31st December,2017
Prepare the journal entry for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $3,480,000
Following assumptions will be taken
As per straight line method the per year depreciation will be
= book value of equipment / no of estimated useful life
= $2,880,000 / 4
=$720,000
The journal entry will be
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
31 dec,2018
Depreciation expense
720,000
Accumulated Depreciation-equipment
720,000
( to record depreciation for the year 2018)
Prepare the journal entry (if any) to record the impairment at December 31, 2017 and for the equipment at December 31, 2018, assuming that Blossom intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.
The journal entry will be
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
31 dec,2017
Impairment loss
720,000
Accumulated Depreciation-equipment
720,000
( to record impairment loss as on 31st December,2017
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
31 dec,2018
Accumulated Depreciation-equipment
600,000
Recovery of loss from impairment
600,000
( to record recovery of impairment loss if equipment is sold in 2018)
Calculation if recovery of loss of impairment = fair value as on 2018 – fair value as in 2017
Calculation if recovery of loss of impairment = $ $3,480,000. - $$2,880,000
= $600,000
No entry for depreciation in 2018 if equipment is intended for sale
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
31 dec,2017
Impairment loss
720,000
Accumulated depreciation-equipment
720,000
( to record impairment loss as on 31st December,2017