Question

Question 4 Cheyenne Corporation uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $8.200 million and had an estimated useful life of 8 years with no residual value. In early April 2017, a part costing $717,500 and designed to increase the machinery’s efficiency was added. The machine’s estimated useful life did not change with this addition. By December 31, 2017, new technology had been introduced that would speed up the obsolescence of Cheyenne’s equipment. Cheyenne’s controller estimates that expected undiscounted future net cash flows on the equipment would be $5.166 million, and that expected discounted future net cash flows on the equipment would be $4.756 million. Fair value of the equipment at December 31, 2017, was estimated to be $4.592 million. Cheyenne intends to continue using the equipment, but estimates that its remaining useful life is now four years. Cheyenne uses straight-line depreciation. Assume that Cheyenne is a private company that follows ASPE 2 a)repare the journal entry to record asset impairment at December 31, 2017, if any b)repare the journal entry to record asset impairment at December 31, 2017, if any c)repare the journal entry to record asset impairment at December 31, 2017, if any d) Repeat part (b), assuming that the equipment is designated as "held for sale" as of January 1, 2018, and that the equipment was not in use in 2018 but was still held by Cheyenne on December 31, 2018 e) Repeat parts (a) and (b), assuming instead that Cheyenne is a public company that prepares financial statements in accordance with IFRS

Answer 1

- An asset is said to be impaired if it's carrying amount exceeds its fair value at any point in time. other than temporary diminution in the value of the asset.

- For computing, Impairment loss fair value is the value higher of an asset's fair market value or estimated discounted cash flow,

- in the given example, estimated discounted future cash flow is $ 4.756 million

and Fair market value is $4.592 Million.

So, Fair value will be $ 4.756 Million.

- Asset's carrying amount as of December 2017 is = $6.150 million.{$8.200 million Less $2.05 million (Depreciation for 2 years = (8.200/8 * 2years) )}

- so. the impairment loss is = $6.150 - $4.756 = $1.394 million

A) Journal entry to record asset impairment at December 31, 2017

1) Impairment loss ac dr. $1.394 million

To Asset A/c $1.394 Million

2) Profit and loss ac Dr.   $1.394 million

To Impairment loss ac   $1.394 million

- Even if the asset was not used by the company in the year 2018, depreciation need to compute on that asset,

so at the end of 2018, the entry will be:

1) Depreciation Ac Dr $1.189 Million

To Asset A/c $1.189 Million

(Depreciation will be calculated prospectively i.e. $4.756 Million / 4 years = $ 1.189 Million)

there is no need to report impairment loss in this case.