Presented below is information related to equipment owned by Suarez Company at D

Question

Presented below is information related to equipment owned by Suarez Company at December 31, 2014.
Cost $ 11,997,000 Accumulated depreciation to date 1,333,000 Expected future net cash flows 9,331,000 Fair value 6,398,400
Assume that Suarez will continue to use this asset in the future. As of December 31, 2014, the equipment has a remaining useful life of 4 years. Prepare the journal entry (if any) to record the impairment of the asset 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.)
Prepare the journal entry to record depreciation expense for 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.)

The fair value of the equipment at December 31, 2015, is $6,798,300. Prepare the journal entry (if any) necessary to record this increase in fair value. (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.)

Explanation / Answer

    First had to determine whether there was an impairment. To evaluate this step, management does a recoverability test. The recoverability test estimates the future cash flows expected from use of that asset and its eventual disposition. If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset, an impairment results. If the recoverability test indicates that an impairment has occurred, a loss is computed. The impairment loss is the amount by which the carrying amount of the asset exceeds its fair value.

         

Future cash flows ($9331000) < Carrying value ($1066400)

Impairment entry:

Loss on Impairment................................................. 4,265,600

          Accumulated Depreciation...........................                    14,265,600

*$1,066,400 – $6,398,400

(b)     Depreciation Expense............................................. 1,599,600

          Accumulated Depreciation...........................                      1,599,600

          **($6,398,400 ÷ 4)

(c)     No depreciation is recorded on impaired assets if fair value increased but Recovery of impairment losses are recorded.

31/12/2015Accumulated Depreciation.............    3, 99,900

                          Recovery of Impairment Loss.....                        3,99,900

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