Impairment Loss On July 1, 2012, Okin Company purchased equipment for $325,000:

Question

Impairment Loss On July 1, 2012, Okin Company purchased equipment for $325,000: the estimated useful life was 10 years and the expected salvage value was $25.000. Straight-line depreciation is used. On July 1, 2016. economic factors cause the market value of the equipment to decrease to $90.000. On this date, Okin evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be $195.000. a. Is the equipment impaired at july 1.2016 b. If the equipment is impaired at july 1. 2016, calculate the amount of the impairment loss. Impairment loss $ c. If the equippment is impaired at july 1. 2016. prepare the journal entry to record the impairment loss. General Journal Debit Credit July To record impairment loss on equipment

Explanation / Answer

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first we need to calculate depreciated value of asset as at July 1, 2016. Depreciation=(325000-25000)/10=$30,000 Carrying value as at july 1 2016=325000-30000*4=$ 205,000 As per US GAAP, impairment loss to be recognized as difference of (carrying value-market price) if the undiscounted cash flows are lower than carrying value. In the given case carrying value of $205,000 exceeds $ 195,000 so impairment loss of $ 115,000 (205000-90000) need to be recognized. a) Yes b) $115,000 c) Debit Credit Impairment loss $115,000 Equipment $115,000 (to record impairment loss)

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