W7. On January 2, assume that the company BB purchases equipment that fabricates

Question

W7. On January 2, assume that the company BB purchases equipment that fabricates a key-product part. That equipment costs $95,000, and its estimated useful life is five years, and after which it is expected to be sold for $10,000. BB uses straight-line depreciation. At the end of the third year, BB estimates that the equipment will generate $39,500 in undiscounted cash flow over its remaining life and that it has a current fair value of $36,000. Is the equipment impaired? If, so, determine the amount of the gain or loss on the asset impairment. (Clearly indicate gain or loss and the amount.)

Explanation / Answer

Particulars Amount Value of asset A $95,000 Yearly Depretiation - Straight Line B $19,000 Depretiation for 3 years C = B*3 $57,000 WDV at the end of three years D = A-C $38,000 After 3 years - Fair value of the asset is E $36,000 Undiscounted Cash Flow beyond 3 years F $39,500 Residual value After 5 years G $10,000 Gainif we carry the asset over the full 5 years H = F+G-D $11,500 Loss if we Impair the asset after 3 years I = E-D -$2,000

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