76. (3 points) Hoosier uses a special machine in its business. Hoosier purchased

Question

76. (3 points) Hoosier uses a special machine in its business. Hoosier purchased the machine on June 30, 2010 for $12,000,000. At the time of the purchase, Hoosier estimated the machine would have a useful life of 12 years with zero salvage value. Hoosier uses a straight-line depreciation method and calculates depreciation to the nearest full month. On December 31, 2015, a new type of machinery was developed and Hoosier feels this new type of machine will cause Hoosier’s existing special machine to be obsolete by December 31, 2017. Hoosier intends to continue to use its special machine until December 31, 2017. Hoosier estimates that the net future cash inflows from using the machine will TOTAL $3,120,000. Hoosier estimates these net cash inflows will be collected evenly on a monthly basis until December 31, 2017 with the first inflow taking place on January 31, 2016. Because Hoosier’s machine is so unique, Hoosier is unable to identify a readily available fair value for the machine, however, Hoosier estimates that similar machines have an 6% annual rate of return on the investment in the asset.

a. Prepare the entry, if any, Hoosier should make to reflect any impairment as of 12-31-15.

b. Prepare the depreciation entry Hoosier should make on 12-31-16. Assume Hoosier only prepares AJEs every 12-31 AND that there were no impairment changes as of 12-31-16.

Explanation / Answer

Calculation of Cost of machine as on 31st December 2015 Total Purchase value as on June 30,2010          12,000,000 Total Estimated useful life of the asset 12 Years Depreciation per year as per straighline method            1,000,000 No of Years from June30,2010 to December 31,2015 5.5 Years Total Depreciatio for the above period            5,500,000 ( June30,2010 to December 31,2015)                     ( 12000000*5.5 / 12) Machine cost as on 31st December 2015            6,500,000 ( 12000000-5500000) For Impairment test we taken higher of the following Estimated Net Future Cash Inflow from the Machine            3,120,000 Annual Rate of return from the similar machines is 6% per annuam Total Annual return for 2 years            1,440,000 ( from Dec 31,2015 to Dec 31,2017) ( 12000000*6% * 2 years) Higher of the above will be Net future cash flows - A            3,120,000 Machinary cost as on 31st December 2015 - B            6,500,000 Impairment loss amount (A-B)          (3,380,000) Journal entry to refelect Impairment as on 31st December 2015 Date Accounting Particulars Debit Credit 31-Dec-15 Impairment Loss - Dr       3,380,000 To Machine (Old machine)            3,380,000 (Being Impairment loss accounted to the machinery) Journal Entry for Depreciation during the year 2016 Cost Value after refelct impairment as on 31st December 2015    3,120,000 (6500000-338000) The machines to be obsolete by December 31,2017 So Remaining life of the asset as ter 31st December 2015 2 Years Depreciation to be charged for One year    1,560,000 (3120000/2 years) Journal Entry Date Accounting Particulars Debit Credit 31-Dec-16 Depreciation - Dr       1,560,000 To Machine (Old machine)            1,560,000 (Being Depreciation charged for the year 2016)

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