Please answer in detail. Additional Problem 8 (Part Level Submission) On January
ID: 2588832 • Letter: P
Question
Please answer in detail.
Additional Problem 8 (Part Level Submission) On January 1, 2015, Blue Ltd. purchased equipment for $760,000. The equipment was assumed to have an 8-year useful life and no residual value, and was to be depreciated using the straight-line method. On January 1, 2017, Blue's management became concerned that the equipment may have become obsolete. Management calculated that the undiscounted future net cash flows from the equipment was $546,250, the discounted future net cash flows was $484,500, and the current fair value of the equipment (after costs to sell) was $475,000. (a1)Explanation / Answer
Current book value = Book value - Depreciation
Depreciation for 2 years = 2* $760000/8 = 2*$95000 = $190000
Current book value of the machine = $760000-$190000 = $570000
Since the book value > fair value of the equipment, impairment exists.
Impairment loss = Book value - Value in use.
Value in use: Higher of
a) Discounted future net cashflows
b) Current fair value
Value in use = $484500
Impairment loss = $570000-$484500 = $85500.
Journal entry will be
Loss on impairment $85500
Accumulated impairment losses-equipment $85500