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 2013 for $10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2014, 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 straightline depreciation. IT IS SAYING PART C NO ENTRY IS NOT CORRECT??

(a) Prepare the journal entry (if any) to record the impairment at December 31, 2014. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

(b) Prepare the journal entry for the equipment at December 31, 2015. The fair value of the equipment at December 31, 2015, is estimated to be $5,900,000. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

(c) Prepare the journal entry (if any) to record the impairment at December 31, 2014 and for the equipment at December 31, 2015, assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2015. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

12/31/14

12/31/15

Account Titles and Explanation

Debit

Credit

Loss on Impairment

1900000

Accumulated Depreciation-Equipment

1900000

Explanation / Answer

The book value of equipment is cost - accumulated depreciation so i don't think you would make an entry for the impairment. It would just be a change in estimate.
the equation for a change in estimate is cost-salvage value- amount depreciated/ remaining useful life
=10,000,000-0- 2,500,000/ 4 =1,875,000 annual depreciation

the JE for dec 31, 2014 would be
dr. depr expense 1,875,000
cr. accumulated depr 1,875,000

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