Presented below is information related to equipment owned by Swiss Company at De

Question

Presented below is information related to equipment owned by Swiss Company at December 31, 2013:

Cost

$9,000,000

Acc. depreciation to date

1,000,000

Expected undiscounted future cash flows

7,000,000

Fair Value

4,800,000

Assume that Swiss Company will continue to use the asset in the future. As of
December 31, 2013, the equipment has a remaining useful life of 4 years and Swiss
uses the straight line method of depreciation.

            REQUIRED:

Prepare the journal entry to record the impairment at December 31, 2013.

Prepare the journal entry to record depreciation expense for 2014.

Prepare the journal entry (if any) necessary to record the increase in fair value to $5,100,000 as of December 31, 2014.

Would your answer to (3) be different if Swiss intended to dispose of the equipment rather than use it in the future?

Cost

$9,000,000

Acc. depreciation to date

1,000,000

Expected undiscounted future cash flows

7,000,000

Fair Value

4,800,000

Explanation / Answer

Prepare the journal entry to record the impairment at December 31, 2013

Book Value of asset as on December 31, 2013 = 9000000 - 1000000 = 8000000

Recoverable amount is Expected undiscounted future cash flows or fair value whichever is lower.

Recoverable amount = 4800000

Impairment loss = 8000000 - 4800000 = 3200000

Journal:

Impairment Loss Dr 3200000

Equipment Cr 3200000

Prepare the journal entry to record depreciation expense for 2014:

Depreciation expense = 4800000/4 = 1200000

Journal:

Depreciation Expense Dr 1200000

Accumulated Depreciation Cr 1200000

Prepare the journal entry (if any) necessary to record the increase in fair value to $5,100,000 as of December 31, 2014.

Equipment Dr 300000

Revaluation Reserves Cr 300000

Answer wil remain same even if Swiss intended to dispose of the equipment rather than use it in the future.

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