Answer:
Journal Entry - Impairment
Debit : Impairment Loss, $854,000
Credit: Accumulated Impairment Loss, $854,000
Journal entry - Depreciation
Debit : Depreciation expense, $2,135,000
Credit : Accumulated Depreciation, $2,135,000
Explanation:
Impairment loss is the excess of the Carrying Amount of an Asset over its Recoverable Amount.
Carrying Amount
Carrying Amount = Cost - Accumulated Depreciation
Depreciation Calculation (Straight line) : (Cost - Salvage Value) / Number of Useful life
2019 = ($12,200,000 - $0) / 8
= $1,525,000
2020 = $12,200,000 - $1,525,000 / 5
= $2,135,000
Note the change in useful life is applied from beginning of the year hence (4+1) years.Also the adjustment is only made in 2019 not retrospectively.
Carrying Amount = $12,200,000 - $1,525,000 - $2,135,000
= $ 8,540,000
Recoverable Amount
Is the higher of :
- Fair Value less Cost to sell : $6,832,000 or,
- Value in use : $7,686,000
Therefore Recoverable amount is $7,686,000
Impairment test
Carrying Amount : $ 8,540,000 > Recoverable amount : $7,686,000
The equipment is impaired.
Impairment loss is $ 8,540,000 - $7,686,000 = $854,000
Journal Entry - Impairment
Debit : Impairment Loss, $854,000
Credit: Accumulated Impairment Loss, $854,000
Journal entry - Depreciation
Debit : Depreciation expense, $2,135,000
Credit : Accumulated Depreciation, $2,135,000
