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1-Presented below is information related to equipment owned by Sarasota Company

ID: 2587269 • Letter: 1

Question

1-Presented below is information related to equipment owned by Sarasota Company at December 31, 2017.

Cost

$10,710,000

Accumulated depreciation to date

1,190,000

Expected future net cash flows

8,330,000

Fair value

5,712,000

Assume that Sarasota will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. Prepare the journal entry to record depreciation expense for 2018-The fair value of the equipment at December 31, 2018, is $6,069,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

2-

Cost

$10,710,000

Accumulated depreciation to date

1,190,000

Expected future net cash flows

8,330,000

Fair value

5,712,000

Explanation / Answer

As the expected future net cash flows of $8,330,000 is less than the Carrying value of equipment of $9,520,000 ($10,710,000 - $1,190,000), the equipment fails the recoverability test. Therefore a loss on Impairment is to be recorded in 2017. The impairment loss is calculated as follows:- (Amount in $)

Journal Entry on December 31, 2017 (Amount in $)

Depreciation expense for 2018 = $5,712,000/4 years = $1,428,000

Journal Entry on December 31, 2017 (Amount in $)

No entry is recorded for increase in fair value because restoration of impairment loss is not permitted.

Cost 10,710,000 Less: Accumulated Depreciation to date (1,190,000) Carrying Value as on December 31, 2017 9,520,000 Fair Value 5,712,000 Loss on Impairment 3,808,000