Question

1. 
   Quick Company acquired a piece of equipment in Year 1 at a cost of $100,000. The equipment has a 10-year estimated life, zero salvage value, and is depre- ciated on a straight-line basis. Technological innovations take place in the in- dustry in which the company operates in Year 4. Quick gathers the following information for this piece of equipment at the end of Year 4: Expected future undiscounted cash flows from continued use ... Present value of expected future cash flows from continued use Net selling price in the used equipment market. $59,000 51,000 50,000
   If Quick Company used Double Declining Balance (DDB) depreciation method instead of straight-line, calculate the following:
   1. Depreciation expense each year
   2. Accumulated depreciation each year
   3. Net book value each year
   4. Impairment loss (if any) at the end of year 4
   5. Comparing the impairment loss in d) with the impairment loss we calculated in class under the straight-line method, discuss the implication.

Answer 1

Answer for a, b, c :

Step 1 : calculation of Depreciation under double declining method

Depreciation expense = Depreciation rate × opening book value of asset

Depreciation rate = 2 × 1/10 × 100 = 20%

Year	opening book vale	Depreciation rate	Depreciation expense	Accumulated depreciation	closing book value
1	$1,00,000	20%	$20,000	$20,000	$80,000
2	$80,000	20%	$16,000	$36,000	$64,000
3	$64,000	20%	$12,800	$48,800	$51,200
4	$51,200	20%	$10,240	$59,040	$40,960

Answee for d :

Step 2 : Calculation of impairment loss

Impairment loss = recoverable Amount - carrying amount

i) Recoverable amount :

Recoverable amount is higher of the following :

1) Fair Value less cost of disposal
2) Value in use (Expected future cash flows at discount rate)

That implies,

1) $50,000

2) $51,000, which ever higher is recoverable Amount

Therefore

Recoverable amount = $51,000

ii) carrying amount under Double declining method = $40,960

Conclusion : there is no impairment loss as recoverable amount is greater than carrying amount under double declining method.

Answer for e :

1) impairment loss under straight line method

i) recoverable amount = $51,000 (same as we calculated above)

ii) carrying amount = cost of asset - Depreciation

Depreciation for 4 years = (cost of asset - salvage value) ÷ life of asset

= ($1,00,000 ÷ 10) × 4 = $40,000

Carrying amount = $1,00,000 -$40,000 = $60,000

Therefore

Impairment loss = recoverable Amount - carrying amount

= $51,000 - $60,000

= $9,000

Conclusion : As we observed that when quick Company used DDB method for Depreciation then there is no impairment loss but when it used straight line method for Depreciation it resulted $9,000 of impairment loss.