Question

Waterway Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $11,900,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2020, new technology was introduced that would accelerate the obsolescence of Waterway's equipment. Waterway's controller estimates that expected future net cash flows on the equipment will be $7,497,000 and that the fair value of the equipment is $6,664,000. Waterway intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Waterway uses straight-line depreciation. – Your answer is partially correct. Prepare the journal entry (if any) to record the impairment at December 31, 2020. (If no entry is required, select "No entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation Dec. Loss on Impairment 3,269,000 31 Accumulated Depreciation-Equipment 3,269,000

Answer 1

Depreciation from Jan 2019 to 31st Dec 2020 = ($11,900,000 / 8) X 2 years = $2,975,000

Book value of the equipment on 31st Dec 2020 = $11,900,000 - $2,975,000 = $8,925,000

Fair value on 31st Dec 2020 = $6,664,000

Impairment loss on 31st Dec 2020 = Book value - Fair value

= $8,925,000 - $6,664,000

= $2,261,000

Date	Account Titles and Explanation	Debit	Credit
Dec 31	Loss on impairment	$2,261,000	-
	Accumulated depreciation	-	$2,261,000
	(To record loss on impairment)

Depreciation on 31st Dec 2021 = $6,664,000 / 4 = $1,666,000

Date	Account Titles and Explanation	Debit	Credit
Dec 31	Depreciation expense	$1,666,000	-
	Accumulated depreciation	-	$1,666,000
	(To record depreciation expense)

The impairment loss on 31st Dec 2020 will be same as 1st journal entry.

Depreciation on impaired assets which are to be disposed will not be recorded.

On 31st Dec 2021 the fair value of the equipment is $7,021,000

Reversal of impairment loss = $7,021,000 - $6,664,000 = $357,000

Date	Account Titles and Explanation	Debit	Credit
12/31/2020	Impairment loss	$2,261,000	-
	Accumulated depreciation	-	$2,261,000
	(To record impairment loss)
12/31/2021	Accumulated depreciation	$357,000	-
	Recovery of impairment loss	-	$357,000
	(To record recovery of impairment loss)