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. PART C THE LOSS ON IMPAIRMENT AND ACCUMULATED DEPRECIATION 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

PARt A Journal Entry Dr Cr 31.12.2014 SPL A/c Dr 1200000 To Provision for Impairment Loss 1200000 (Being Impaiment Loss booked) Working Carrying amount as on 31.12.2014 Opening Value 10000000 Less: Dep for 2 year 2500000 7500000 Impairment Loss = Carrying Amt - Recoverable Amoubt Whereas, Recoverable Amount is Value in Use or Net S P whichever is higher Impairment Loss = 7500000-6300000 = 1200000 PARt B Journal Entry Dr Cr 31.12.2015 Provision For Impairment Loss 900000 To SPL 900000 (Being Impaiment Loss reversed) Working Carrying Amount on 01.01.2016 6300000 Dep for the year 1575000 WDV on 31.12.2016 4725000 Recoverable Amount 5900000 Reversal will be lower of following i) Recoverable Amt - Carrying Amt 1175000 ii) Impairment Loss - Saving In Dep 900000

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