Question

Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000. The journal entry to record the impairment loss will...(a)record a discontinued operations loss of $80,000.(b)increase the asset's Accumulated Depreciation account by $285,000.(c)reduce income from continuing operations by $205,000.(d)include a $285,000 credit to the asset account.

Answer 1

Answer:

(d) include a $285,000 credit to the asset account.

Explanation:

Provided cost of machinery = $2,200,000

Since future estimated cash flows = $1,995,000

Fair value of machinery = $1,915,000,

Impairment loss is the loss which is the difference between carrying value and fair value in case where fair value is less than carrying value.

In the given case the asset would have been carried at $2,200,000

And the fair value = $1,915,000

Therefore the difference = $2,200,000 - $1,915,000 = $285,000 is the impairment loss, and with this amount the asset account will be credited.