Presented below is information related to equipment owned by Swiss Company at De
ID: 2588335 • Letter: P
Question
Presented below is information related to equipment owned by Swiss Company at December 31, 2013:
Cost
$9,000,000
Acc. depreciation to date
1,000,000
Expected undiscounted future cash flows
7,000,000
Fair Value
4,800,000
Assume that Swiss Company will continue to use the asset in the future. As of
December 31, 2013, the equipment has a remaining useful life of 4 years and Swiss
uses the straight line method of depreciation.
REQUIRED:
Prepare the journal entry to record the impairment at December 31, 2013.
Prepare the journal entry to record depreciation expense for 2014.
Prepare the journal entry (if any) necessary to record the increase in fair value to $5,100,000 as of December 31, 2014.
Would your answer to (3) be different if Swiss intended to dispose of the equipment rather than use it in the future?
Cost
$9,000,000
Acc. depreciation to date
1,000,000
Expected undiscounted future cash flows
7,000,000
Fair Value
4,800,000
Explanation / Answer
Prepare the journal entry to record the impairment at December 31, 2013
Book Value of asset as on December 31, 2013 = 9000000 - 1000000 = 8000000
Recoverable amount is Expected undiscounted future cash flows or fair value whichever is lower.
Recoverable amount = 4800000
Impairment loss = 8000000 - 4800000 = 3200000
Journal:
Impairment Loss Dr 3200000
Equipment Cr 3200000
Prepare the journal entry to record depreciation expense for 2014:
Depreciation expense = 4800000/4 = 1200000
Journal:
Depreciation Expense Dr 1200000
Accumulated Depreciation Cr 1200000
Prepare the journal entry (if any) necessary to record the increase in fair value to $5,100,000 as of December 31, 2014.
Equipment Dr 300000
Revaluation Reserves Cr 300000
Answer wil remain same even if Swiss intended to dispose of the equipment rather than use it in the future.