Question

Question 4 7 marks The management of Stag Inc. was reviewing its equipment for impairment. The equipment had a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2019. At this date the management has projected the present value of the future cash flows from the equipment to be $300,000. An equipment appraiser indicated that the equipment would likely sell for $322,000 net of a 15% transaction fee. Stag Inc. intends to continue using the equipment in the future and estimates that it still has four years of useful life remaining. Straight line depreciation is applied. The financial year end December 31. Required: a) Perform the impairment test on the equipment. [4 marks] b) Prepare the joumal entry (if any) to record the impairment at December 31, 2019. [2 marks] Calculate the annual depreciation for 2020. [1 mark] c)

Answer 1

Impairment loss is the amount by which the assets carrying value is in excess of recoverable amount Carrying Amount is the amount at which the assets are reported in the balance sheet after deducting depreciation and impairment loss if any Recoverable amount is higher of the assets fair value less cost to sale those assets and its value in use. Value in use means the present value of the future cash flow generated from the asset. Impairment test is done when there is an indication of the asset may be have impaired except in case of goodwill and intangible assets with indefinite useful live which is be done annually. Ans a Step 1 Calculation of Carrying Amount $9,00,000 Cost Less: Accumulated Depreciation to date Carrying Value ($4,00,000) 000 Step 2 calculate the impairment loss $3,22,000 Sale value Less: Cost to sale @15%| ($48,300) $2,73,700 Fair Value (A) Value in use (B) $3,00,000 $3,00,000 Recoverable amount if higher of (A) and (B) Impairment loss Carrying Value less Receoverable amount Impairment loss [$500000-$300000] Hence, the asset is impaired by $2,00,000 Journal Entry Date Particulars Ans b Debit Credit Dec 31, 17 Impairment Loss $2,00,000 Equipment (To Record impairment loss) $2,00,000 Depreciation for 2020 Revised carrying value Ans c $3,00,000 Revised useful life 4.00 Deprectiation for 2020 [$300000/4] $75,000