Question

Problem 4: Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $6,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Dolphin’s equipment. Dolphin’s controller estimates that expected future net cash flows on the equipment will be $3,750,000 and that the fair value of the equipment is $3,300,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dolphin uses straight-line depreciation.

Instructions

1. What is the carrying value of the asset?
2. Prepare the journal entry (if any) to record the impairment at December 31, 2017.
3. Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $3,450,000.
4. Repeat the requirements for (a) and (b), assuming that Dolphin intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.

Answer 1

Solution :

A) Carrying value of asset

= $6,000,000 - $ 1,500,000 = $ 4,500,000

Note : ($6,000,000/8)x2 = $ 1,500,000

B) Prepare the journal entry (if any) to record the impairment at December 31, 2017:

Carrying value of asset = $4,500,00

Future cash flow ($ 3,750,00) < Carrying value ($4,500,000)

Dec 31 loss on impairment $ 1,200,000

Accumulated Depreciation $ 1,200,000

$ 4,500,000 - $ 3,300,000 = $ 1,200,000

C) Prepare the journal entry for the equipment at December 31, 2018:

Dec 31 Depreciation Expenses $ 825,000

Accumulated Depreciation $ 825,000

$ 3,300,000/ 4 = $ 825,000

D) Prepare the journal entry (if any) to record the impairment at December 31, 2017 and for the equipment at December 31, 2018, assuming that Dolphin intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018:

No depreciation is recorded on impaired assets to be disposed of. Recovery of impairment losses are recorded.

12/31/2017 Loss on Impairment $ 1,200,000

Accumulated Depreciation $ 1,200,000

12/31/2018 Accumulated Depreciation $ 150,000

Recovery of impairment loss $ 150,000

$ 3,450,000 - $ 3,300,000 = $ 150,000