Question

Presented below is information related to equipment owned by Sheffield Company at December 31, 2020.

Cost $10,530,000 Accumulated depreciation to date 1,170,000 Expected future net cash flows 8,190,000 Fair value 5,616,000 Sheffield intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be $23,400. As of December 31, 2020, 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, 2020. (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.)

Prepare the journal entry (if any) to record depreciation expense for 2021. (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.)

The asset was not sold by December 31, 2021. The fair value of the equipment on that date is $6,201,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still $23,400. (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.)

Answer 1

When the fair value of long-term asset falls below it carrying amount, impairment loss shall be recognized provided the difference is not expected to be recovered. Impairment loss shall be recognized and accrued to obtain the assets revaluation.

Impairment loss = Book value of asset – fair value of asset

The required journal entries are:

Date	Particulars	Debit ($)	Credit($)
a.	Loss on depreciation	3,767,400
	Accumulated depreciation		3,767,400
	(To record impairment)
b.	No depreciation is recorded on assets intended to be disposed off
c.	Accumulated depreciation	585,000
	Recovery on loss of impairment		585,000
	(To record increase in fair value)

Workings

Computation of loss on impairment

Cost	10,530,000
Less: Accumulated depreciation	1,170,000
Carrying Amount	9,360,000
Less:Fair value, net of disposal costs (5616000-23400)	5,592,600
Loss on impairment	3,767,400

Computation of Recovery of loss on Impairment

Revised Fair value, net of disposal costs (6201000-23400)	6,177,600
Less: Fair value, net of disposal costs	5,592,600
Recovery of loss on Impairment	585,000

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