Question

Zeibart Company purchases equipment for $225,000 on July 1, 2016, with an estimated useful life of 10 years and expected salvage value of $25,000. Straight-line depreciation is used. On July 1 2020, economic factors cause the fair value of the equipment to decline to $90,000. On this date Zeibart examines the equipment for impairment and estimates $125,000 in future cash inflows related to use of this equipment Is the equipment impaired at July 1, 2020? Explain If the equipment is impaired on July 1, 2020, compute the impairment loss and prepare a jour- nal entry to record the loss
What amount of depreciation expense would Zeibart record for the 12 months from July 1 2020 through June 30, 2021?

Prepare a journal entry to record this depreciation expense. (Hint: Assume no change in salvage value.) Using the financial statement effects template, show how the entries in parts b and c affect Zeibart Company's balance sheet and income statement

Answer 1

Answer:

At July 1, 2020 the equipment is impaired. The impairment loss is $20000

Journal

Impairment loss - Equipment $ 20000 (debit), Accumulated impairment loss $20000 (credit)

Explanation:

Impairment loss is recognized when the Recoverable Value of an asset is less than the Carrying Amount of the of an asset.

Recoverable Value of the Equipment

The Recoverable Value of Equipment is the Higher of :

    1. Value in use of the equipment

Value in use is the Present Value of future cash flows to be obtained from the asset (through use and disposal of asset at the end of its useful life).

Zeibart estimates $125000 from use of equipment.Thus Value in use is $125000

   2. Fair Value less of disposal

Fair value is the amount obtained on sale of the equipment in an orderly market transaction

Fair Value on July 1 2020 is $90000

Therefore the recoverable amount is $ 125000 (Value in use) which is higher.

Carrying Amount of the Equipment

Carrying Amount of the Equipment is Cost Less Accumulated Depreciation and Previous Impairment losses.

Cost = $225000

Accumulated Depreciation

Depreciation per year = ($225000-$25000)/10 = $20000

Depreciation July 1, 2016 to July 1, 2020 = $20000 × 4 YEARS = $80000

Accumulated depreciation up to July 1, 2020 is thus $80000

Carrying Amount of the Equipment is$145000 ($225000 - $80000)

Impairment Test

Carrying Amount $ 145000 > Recoverable Amount $ 125000

Therefore the equipment is impaired.

Impairment loss is $ 145000 - $1250000 = $ 20000