On January 1, 2011, Borstad Company purchased equipment for $1,150,000. It is de
ID: 2599497 • 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 $450,000 and will incur cash outflows of $341,000 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 10%.
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 14% 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 $14,000 each year? 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $630,000 and estimates that it would cost $15,000 to sell the equipment. How much would the company recognize as the impairment loss?Explanation / Answer
1)
Purchase price of equipment as on January 1, 2011 = 1150000
Life of Equipment = 25 years
Depreciation per year as per straight line method = 1150000/25 = 46000
Accumulated depreciation = -46000*6 = -276000
Book Value of equipment in later 2016 = 1150000 - 46000*6 = 1150000 - 276000 = 874000
Net cash inflows for the next 8 years = 450000 - 341000 = 109000
Present value of net cash inflows = 109000*Present value annuity factor(10%,8)
= 109000*5.334 = 581406
Impairment loss = Book Value -Present value of net cash inflows
= 874000 - 581406 = 292594
2)
Impairment loss Dr 292594
Equipment Cr 292594
3)
Present value of net cash inflows = 109000*Present value annuity factor(14%,6)
= 109000*3.888 = 423792
Book Value of equipment in later 2016 = 1150000 - 46000*6 = 1150000 - 276000 = 874000
Impairment loss = Book Value -Present value of net cash inflows
= 874000 - 423792 = 450208
4)
Net cash inflows for the next 8 years = 450000 - (341000-14000) = 123000
Present value of net cash inflows = 109000*Present value annuity factor(10%,8)
= 123000*5.334 = 656082
Book Value of equipment in later 2016 = 1150000 - 46000*6 = 1150000 - 276000 = 874000
Impairment loss = Book Value - Present value of net cash inflows
= 874000 - 656082 = 217918
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