Problem 2 (20 Points) Raiders Company uses special strapping equipment in its pa
ID: 2600721 • Letter: P
Question
Problem 2 (20 Points) Raiders Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $3,000,000 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 the equipment. Raiders' controller estimates that expected future net cash flows on the equipment will be $1,750,000 and that the fair value of the equipment is $1,650,000. Raiders intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Raiders uses straight-line depreciation. (You must show your computations to receive credit.) Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31,2017. (b) Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2013, is estimated to be $1,725,000. 20 % (c) Repeat the requirements for (a) and (b), assuming that Raiders intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.Explanation / Answer
a) Depreciation = Cost/useful life = $3,000,000/8 = $375,000
Depreciation for 2016 and 2017 = $375,000*2 = $750,000
Carrying value of asset at end of year 2017 = $3,000,000 - $750,000 = $2,250,000
As future cash flows of $1,750,000 is less than carrying amount of asset of $2,250,000 on December 31, 2017, the loss on impairment will be recognized of $600,000 ($2,250,000-$1,650,000).
Journal Entry (Amount in $)
b) Journal Entry (Amount in $)
c) No depreciation to be recorded on impaired assets to be disposed of. Recovery of impairment losses are recorded as follows:-
Journal Entry (Amount in $)
Date Account Title Debit Credit Dec. 31, 2017 Loss on impairment 600,000 Accumulated Depreciation 600,000 (To record the loss on impairment)