Question

The management of Stag Inc. was reviewing its equipment for impairment. The equipment had a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2019. At this date the management has projected the present value of the future cash flows from the equipment to be $300,000. An equipment appraiser indicated that the equipment would likely sell for $322,000 net of a 15% transaction fee.

Stag Inc. intends to continue using the equipment in the future and estimates that it still has four years of useful life remaining. Straight line depreciation is applied. The financial year end December 31.

Required:

1. Perform the impairment test on the equipment. [4 marks]
2. Prepare the journal entry (if any) to record the impairment at December 31, 2019.
3. Calculate the annual depreciation for 2020. [1 mark]

Answer 1

S No	Stag INC	Amount in $	Remarks
	Data available as on Dec 31, 2019
	Original cost of equipment	900,000
	Accumulated dep till date	400,000
	Carrying value	500,000
	Present value of future cash flows from equipment	300,000
	Sales value	322,000
	Remaining useful life	4	yrs
1	Recoverable value
	We need to first compute the value in use of the asset
	higher of assets future value of the assets or sales value (net of cost)	322,000
2	Test for impairement
	compare the carrying amount of the assets with recoverable value	178,000
	i.e 500000 or 322000 (difference would be impairement)
3	Entry for impairment
	Impairement exp Dr	178,000
	To Carrying value of fixes asset	178,000
4	Annual dep for year 2020
	Remaining value after impairment	322,000
	useful life	4	yrs
	Dep	80,500