Question

Presented below is information related to equipment owned by Sandhill Company at December 31, 2017. Cost $6,960,000 Accumulated depreciation to date 696,000 Expected future net cash flows 4,640,000 Fair value 3,248,000 Assume that Sandhill will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2017 Prepare the journal entry to record depreciation expense for 2018. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2018 The fair value of the equipment at December 31, 2018, is $3,480,000. Prepare the journal entry (if any) necessary to record this increase in fair value. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

An asset is said to be impaired when its carrying amount i.e. book value is higher than its recoverable amount. In such case, difference between recoverable amount & carrying amount is recognised as Impairment loss. Recoverable amount is higher of asset's fair value less costs to sell and asset's value in use i.e. expected cash flows from asset. Sandhill Company Carrying value = Cost - Accumulated depreciation = $6,960,000- $ 696,000 S 6,264,000 Expected future net cash flows = $4,640,000 Fair Value = 3,248,000 Recoverable Value = 4,640,000