On January 1, 2011, Borstad Company purchased equipment for $1,150,000. It is de
ID: 2530492 • Letter: O
Question
On January 1, 2011, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2016, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $450,000 and will incur cash outflows of $341,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstad’s discount rate is 10%.
Required: 1. Prepare schedules to determine whether, at the end of 2016, the equipment is impaired and, if so, the impairment loss to be recognized. Enter the Accumulated Depreciation amount as a negative number. 2. Prepare the journal entry to record the impairment. 3. Next Level How would your answer to Requirement 1 change if the discount rate was 14% and the cash flows were expected to continue for 6 years? 4. Next Level How would your answer change if management planned to implement efficiencies that would save $14,000 each year? 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $630,000 and estimates that it would cost $15,000 to sell the equipment. How much would the company recognize as the impairment loss? CHART OF ACCOUNTS Borstad Company General Ledger not a ASSETS REVENUE 111 Cash 121 Accounts Receivable 141 Inventory 185 Equipment 198 Accumulated Depreciation 411 Sales Revenue 3. EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 523 Salaries Expense 531 Bad debt Expense 532 Depreciation Expense 540 Interest Expense 891 Loss on Impairment 5. LIABILITIES 211 Accounts Payable 221 Notes Payable 224 Interest Payable 231 Salaries Payable EQUITY 311 Common Stock 331 Retained EarningsExplanation / Answer
1) Prepare schedules to determine whether, on December 31, 2016, the equipment is impaired and, if so, the impairment loss to be recognized. Enter the Accumulated Depreciation amount as a negative number. Additional Information Complete the Recoverability Test and determine the results of the test. Borstad Company Recoverability Test December 31, 2016 Book Value: Equipment (cost) $1,150,000 Less: Accumulated Depreciation = $1,150,000/25years x 5 years $230,000 Net Book Value $920,000 Undiscounted expected net cash inflows :$450,000 x 8 years $3,600,000 Undiscounted expected net cash outflows $341,000 x 8 years -$2,728,000 Fair value $872,000 The book value is more than the undiscounted expected net cash flows so Borstad would recognize an impairment loss at December 31, 2016. Complete the Impairment Analysis to determine the amount of the loss (if any) under US GAAP at December 31, 2016. Additional Information Borstad Company Impairment Analysis (US GAAP) December 31, 2016 Fair Value: Present Value of the Expected Net Cash Flows $840,000 x PVIFA (10%,8) = $840,000 x 6.8137 $4,652,055.64 Cost to sell $0 Equipment (book value) $920,000 Impairment Loss (if any) $3,732,055.64 Year Cash Flows PV @ 10% Present Value 1 $872,000 0.9091 $792,727.27 2 $872,000 0.8264 $720,661.16 3 $872,000 0.7513 $655,146.51 4 $872,000 0.6830 $595,587.73 5 $872,000 0.6209 $541,443.39 6 $872,000 0.5645 $492,221.27 7 $872,000 0.5132 $447,473.88 8 $872,000 0.4665 $406,794.44 $4,652,055.64 2) Journal Entry Loss on Impairment $3,732,055.64 Accumulated Depreciation—Equipment $3,732,055.64
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