Question

Computing and Assessing Plant Asset Impairment On July 1, Arcola Company purchases equipment for $330,000. The equipment has an estimated useful life of 10 years and expected salvage value of $40,000. The company uses straight-line depreciation. Four years later, economic factors cause the fair value of the equipment to decline to $160,000. On this date, Arcola examines the equipment for impairment and estimates $185,000 in undiscounted expected cash inflows from this equipment.
(a) Compute the annual depreciation expense relating to this equipment. $ 29,000
(b) Compute the equipment's net book value at the end of the fourth year. 214,000 v
(c) Apply the test of impairment to this equipment as of the end of the fourth year. Is the equipment impaired?
i. Yes, because the fair value is less than the net book value.
ii. Yes, because the net book value is greater than the salvage value.
iii. Yes, because the undiscounted expected cash flows are less than net book value.
iv. No, because the net book value minus the salvage value is greater than the undiscounted expected cash flows.
v. No, because the net book value minus the salvage value is less than the undiscounted expected cash flows
(d) If the equipment is impaired at the end of the fourth year, compute the impairment loss. (If the equipment is not impaired, enter o.)

Answer 1

Answer:

(a) Compute the annual depreciation expense relating to this equipment.

annual depreciation expense = ($330,000 - $40,000) / 10 years = $29,000

(b) Compute the equipment's net book value at the end of the fourth year.

book value at end of yer 4 = $330,000 - (4 x $29,000) = $214,000

(c) Apply the test of impairment to this equipment as of the end of the fourth year. Is the equipment impaired?

ii. Yes, because the net book value is greater than the salvage value.

(d) If the equipment is impaired at the end of the fourth year, compute the impairment loss.

fair value = $160,000

net book value = cost - {[(cost - salvage value) / estimated useful life] x period covered}

net book value = $330,000 - {[($330,000 - $40,000) / 10] x 4}

net book value = $330,000 - {[$290,00 / 10] x 4} = $330,000 - ($29,000 x 4) = $330,000 - $116,000 = $214,000

impairment loss = $214,000 - $160,000 = $54,000