Oh No! Inc. uses a special piece of equipment in its packaging business. The equ

Question

Oh No! Inc. uses a special piece of equipment in its packaging business. The equipment was purchased on 1/1/2002 for $6,000,000 and had an estimated useful life of 6 years and no salvage value. On December 31.2003, new technology was introduced that accelerated the obsolescence of Oh No!'s equipment. The controller estimates that expected future net cash flows on the equipment will be $3,250,000 and that the fair value of the equipment is $3,000,000. What is the amount of impairment on the equipment.

Explanation / Answer

Solution:

Option a is correct.

Cost of equipment = $6,000,000

Useful life = 6 years

Expected future net cash flows = $3,250,000

Fair value of equipment = $3,000,000

First, we calculate the depreciation.

Depreciation = Cost/Useful life x 2

Depreciation = $6,000,000/6 x

Depreciation = $2,000,000

Now, calculate the carrying value of the equipment

Carrying value of the equipment = Cost – Depreciation

Carrying value of the equipment = $6,000,000 - $2,000,000

Carrying value of the equipment = $4,000,000

Since the future cash flows is less than the carrying value of the equipment, therefore there loss on impairment.

Amount of impairment = $5,000,000 - $4,000,000

Amount of impairment = $1,000,000

Hence, the amount of impairment on the equipment is $1,000,000.

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