Question

2. Harvester Inc. owns equipment for which it paid $100 million. At the end of 2006, it had accumulated depreciation charges on the equipment of $49 million. Due to adverse economic conditions, Harvester's management determined that it should assess whether an impairment should be recognized for the equipment. Assume that the estimated futu re cash flows (without discounting) to be provided by the equipment total $60 million, and its fair value at that point totals $55 million. In accordance with U.S. GAAP and under these circumstances, what is the amount of impairment loss Harvester should recognize? Prepare any necessary journal entries. (2 points) a. ks tromm the 4ufon of b. Assume that the estimated future cash flows (without discounting) to be provided by the equipment total $50 million, and its fair value at that point totals $45 million. In accordance with U.S. GAAP and under these circumstances, what is the amount of impairment loss Harvester should recognize? Prepare any necessary journal entries. (2 points)

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Date Page Impaigment Testing Important Note: -undaUSGAAP tuo step impciis ment test is made Step 1: The carrying amount of asset is compared with estimated Leodiscounted future cashflows_If cangrying amount ing wower than undiscounted estimated future cashflows, then "No impairment" Step 2: It carrying some amount oss higher than estimated con discounted future cashflows, then impairprent loss shall be consēdered as cliffesience between carrying amount g fais, value" Application of above steps in question Harvester Inc millions) Equipment cost = $ 100 Loss: Acceemulated . depreciation = $ 49 Carreying amount = $51 (100-49)

Date Page a) When estimated future cashflows (undiscounted) are $60 million. In this case, the estimated future cashflows are higher than carrying amount of asset. The & future cash flows are $60 million > $51 million of carrying amount This "Step1" satisfied. Hence "No impaistnené“ made NO JOURNAL ENTRY b) when estimato Cundis counted) are $50 million In this case, the estimated future cash flows (undiscounted) lower than carrying amount of asset. The future Cashflows are $50 million LISI million of carrying amount - Thus "Step 2" satisfied. Hence impairment made. Impairment loss. Difference between cassering amount and fais value of asset (millions) Carrying amount - $50 Less : Fair value $45 Impairment loss $6

Journal Entry (millions) (million Debit Credit Dat / yecial 2006 Particulars C D Impairment loss der To accumulated to a allt depreciation of To record impairment loss on equipment) $6 urice $6