Question

On July 1, 2015, Karen Company purchased equipment for $325,000; the estimated useful life was 10 years and the expected salvage value was $40,000. Straight-line depreciation is used. On July 1, 2019, economic factors cause the market value of the equipment to decrease to $90,000. On this date, Karen evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be $195,000.
Required:
a. Is the equipment impaired at July 1, 2019? Explain.
b. If the equipment is impaired at July 1, 2019, calculate the amount of the impairment loss.
c. If the equipment is impaired at July 1, 2019, prepare the journal entry to record the impairment Bidings Goodwil komat kumulat loss.

Answer 1

Answer:

Karen Company

a. The equipment is impaired at July 1, 2019 because its projected future cash flows of $195,000 are less than its current carrying value of $211,000.

b. The amount of the impairment loss is:

= $16,000.

c. Journal Entry to record the impairment:

July 1, 2019:

Debit Impairment Loss $16,000

Credit Equipment $16,000

To record the estimated impairment loss.

Explanation:

a) Data and Calculations:

July 1, 2015:

Purchase cost of equipment = $325,000

Estimated useful life = 10 years

Expected salvage value = $40,000

Depreciable amount = $285,000 ($325,000 - $40,000)

Annual depreciation expense = $28,500 ($285,000/10)

July 1, 2019:

Total accumulated depreciation = $114,000 ($28,500 * 4 years)

Carrying amount of the equipment = $211,000 ($325,000 - $114,000)

Projected future cash flows = $195,000

Difference (Impairment loss) $16,000