On July 1, 2012, Okin Company purchased equipment for $280,000; the estimated us
ID: 2542953 • Letter: O
Question
On July 1, 2012, Okin Company purchased equipment for $280,000; the estimated useful life was 10 years and the expected salvage value was $25,000. Straight-line depreciation is used. On July 1, 2016, economic factors cause the market value of the equipment to decrease to $90,000. On this date, Okin evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be $125,000.
a. Is the equipment impaired at July 1, 2016?
b. If the equipment is impaired at July 1, 2016, calculate the amount of the impairment loss.
Impairment loss = $
c. If the equipment is impaired at July 1, 2016, prepare the journal entry to record the impairment loss.
Explanation / Answer
a) Annual depreciation for the Equipment = (Cost - Salvege value)/Useful Life
= ($280,000 - $25,000)/10 yrs = $25,500
Total Depreciation charged upto July 1, 2016 = $25,500*4 yrs = $102,000 (from july 1, 2012 to july 1, 2016)
Carrying Value on July 1, 2016 = Cost - Depreciation charged
= $280,000 - $102,000 = $178,000
Fair Value of Equipment = $90,000
Value in use = $125,000
Recoverable Amount = Higher of Fair Value or Value in use (higher of $90,000 or $125,000 i.e. $125,000)
As the recoverable amount of machine of $125,000 is less than carrying value of $178,000, the equipment will be impaired at July 1, 2016.
b) Impairment Loss = Carrying Value - Recoverable Amount
= $178,000 - $125,000 = $53,000
c) Journal Entry (Amounts in $)
Date Account Titles and Explanation Debit Credit July 1, 2016 Impairment Loss 53,000 Accumulated Depreciation and impairment losses 53,000 (To record the impairment loss)