On January 1, 2011, Borstad Company purchased equipment for $1,150,000. It is de
ID: 2585374 • 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 $390,000 and will incur cash outflows of $281,000 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 14%. 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 18% 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 $11,000 each year? 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $554,000 and estimates that it would cost $13,000 to sell the equipment. How much would the company recognize as the impairment loss?
Explanation / Answer
Requirement 1 Accumulated Depreciation 1150000x5/25=230000 Requirement 2 Carrying amount Cost of assest - Accumulated depreciation 1150000- 230000 = 920000 Recoverable amount Higher of the following: i.e 505651 Fair value 0 or Value in Use = Present value of future cash flows Cash Flow x PVAF (n,r) = Present Value 390000-281000 x 4.639 (8yrs, 14%) = 505651 Impairment Loss Carrying Amount - Recoverable Amount 920000 - 505651 = 414349 Impairment Loss Dr 414349 To Accumulated Impairment Loss 414349 Requirement 3 Carrying amount Cost of assest - Accumulated depreciation 1150000- 230000 = 920000 Recoverable amount Higher of the following: i.e 381282 Fair value 0 or Value in Use = Present value of future cash flows Cash Flow x PVAF (n,r) = Present Value 390000-281000 x 3.498 (6yrs, 18%) = 381282 Impairment Loss Carrying Amount - Recoverable Amount 920000 - 381282 = 538718 Impairment Loss Dr 538718 To Accumulated Impairment Loss 538718 Requirement 4 Carrying amount Cost of assest - Accumulated depreciation 1150000- 230000 = 920000 Recoverable amount Higher of the following: i.e 556680 Fair value 0 or Value in Use = Present value of future cash flows Cash Flow x PVAF (n,r) = Present Value 390000-281000+11000 x 4.639 (8yrs, 14%) = 556680 Impairment Loss Carrying Amount - Recoverable Amount 920000 - 556680 = 363320 Impairment Loss Dr 363320 To Accumulated Impairment Loss 363320
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