Flounder Company owns equipment that cost $1,089,000 and has accumulated depreci

Question

Flounder Company owns equipment that cost $1,089,000 and has accumulated depreciation of $459,800. The expected future net cash flows from the use of the asset are expected to be $605,000. The fair value of the equipment is $484,000.

Prepare the journal entry, if any, to record the impairment loss. (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.)

Account Titles and Explanation

Debit

Credit

Account Titles and Explanation

Debit

Credit

Explanation / Answer

Impairment of an asset happens when the carrying cost of an asset exceed the fair market value. In such a case, the excess of carrying amount over fair value has to be recognized as a loss and the carrying cost of the asset is required to be reduced correspondingly.

In this case, the cayying cost of asset i.e. Cost less accumulated depreciation is $ 629,200 ($1,089,000-$459,800) against which the fair market value of asset is $484,000. This excess amount of $145,200 will be recognized as an impairment loss and the carrying cost of the asset would also be reduced as under:

Debit Credit Loss on Impairment $145,200 Equipment A/c $ 145,200 (Being impairment loss recorded)

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