Question

On January 1, 2014, Borstad Company purchased equipment for $1,200,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, 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 $400,000 and will incur cash outflows of $293,000 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 2019, the equipment is impaired and, if so, the impairment loss to be recognized. 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 $10,000 each year? 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $619,000 and estimates that it would cost $14,000 to sell the equipment. How much would the company recognize as the impairment loss?

Answer 1

Answer is given below

Purchase cost Life of asset Annual Depreciation $1,200,000 25 years $48,000 Depreciation for 6 years Carrying value 2019 end $288,000 $912,000 A Cash inflows Cash outflows Net cash inflows PV factor for 8 years 10% Present value of cash inflows $400,000 $293,000 $107,000 5.3349 $570,837 B Since PV of cash inflows is lower than carrying value asset is impaired Impairment loss $341,163 A-B Credit Date Journal 31-Dec-19 Impairment Loss To Equipment Debit $341,163 $341,163 Net cash inflows PV value of 14% for 6 years Present value of cash inflows $107,000 3.8887 $416,087 C Impairment Loss $495,913 A-C Cash inflows Cash outflows Net cash inflows PV value of 14% for 6 years Present value of cash inflows $410,000 $293,000 $117,000 3.8887 $454,974 D Impairment Loss $457,026 A-D Cash inflows Cash outflows Net cash inflows PV factor for 8 years 10% Present value of cash inflows $400,000 $293,000 $107,000 5.3349 $570,837 A $605,000 B Fair Value (Fair value - selling cost) $605,000 B Recoverable value is higher of above (A or B) Carrying value 2019 $912,000 Impairment Loss $307,000 C-B