Question

Shown below are the T accounts relating to equipment that was purchased for cash by a company on the first day of the current year. The equipment was depreciated on a straight-line basis with an estimated useful life of 10 years and a residual value of $250. Part of the equipment was sold on the last day of the current year for cash proceeds while the remaining equipment that was not sold became impaired.

Reconstruct the journal entries to record the following and derive the missing amounts:

(a)		Purchase of equipment on January 1. What was the cash paid?
(b)		Depreciation recorded on December 31. What was the depreciation expense?
(c)		Sale of part of the equipment on December 31. What was the gain on disposal?
(d)		Partial impairment loss on the remaining equipment on December 31. What was the impairment loss? Cash Jan. 1 (a) Dec. 31 650 Equipment 1,600 Jan. 1 Dec. 31 640 Accumulated Depreciation-Equipment Dec. 31 135 54 Dec. 31 Dec. 31 54 Depreciation Expense Dec. 31x (b) Gain on Disposal Dec. 31 64 (c) Impairment Loss Dec. 31X

Answer 1

a) Cash paid for the purchase of equipment on January 1 is $1,600.

In the T-Account of Equipment, the amount stated on January 1 on the debit side of the T-Account ($1,600) is the purchase value of the equipment and the entire equipment is purchased by cash only. Therefore, cash paid for the purchase of equipment is $1,600.

b) Depreciation expense on December 31 is $135

When depreciation is charged, depreciation expense is debited and accumulated depreciation account is credited. Thus, in the T-Account of Accumulated Depreciation, the amount of $135 recorded on the credit side of the Accumulated Depreciation account is the depreciation expense.

Therefore, depreciation expense amount is $135.

c) Considering the limited information like no information on the sale value of the equipment, part of the cost of the equipment are not given. As per the T-Account, the amount of gain on sale of equipment is $64.

d) Impairment loss is the difference between Cost of equipment and fair value and when cost of the equipment is more than the fair value is the impairment loss but considering the limited information from T-Account of Equipment, the ending value of the equipment is $640 but fair value of the equipment is not given. Based on this information, you can calculate the impairment loss by considering the fair value of the equipment. If you come across any queries, please do comment, i will explain.