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 = <u>$54,000</u>
