Roland Company uses special strapping equipment in its packaging business. The e

Question

Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2011 for $10,100,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2012, new technology was introduced that would accelerate the obsolescence of Roland's equipment. Roland's controller estimates that expected future net cash flows on the equipment will be $6,300,000 and that the fair value of the equipment is $5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation. (a) Prepare the journal entry (if any) to record the impairment at December 31, 2012. (b) Prepare the journal entry for the equipment at December 31, 2013. The fair value of the equipment at December 31, 2013, is estimated to be $5,900,000.(c) repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2013.

Explanation / Answer

(a)Carrying value of asset:

$10,000,000 %u2013 $2,500,000* = $7,500,000

*($10,000,000/8) X 2

S0 Future cash flows ($6,300,000) < Carrying value ($7,500,000)

Impairment entry:

Loss on Impairment Dr1,900,000*

Accum Dep%u2014Eqpt Cr 1,900,000

(*$7,500,000 %u2013 $5,600,000)

(b) Dep Exp Dr 1,400,000**

Accum Dep%u2014Eqpt Cr 1,400,000

( **($5,600,000 / 4))

(c) No Dep is recorded on impaired assets to be disposed of. Recovery of impairment losses are recorded.

12/31/12%u2003Loss on Impairment Dr 1,900,000

Accum Dep%u2014 Eqpt Cr 1,900,000

12/31/13%u2003Accum Dep%u2014Eqpt DR 300,000

Recovery of Loss on Impairment Cr 300,000

($5,900,000 %u2013 $5,600,000)

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.