Question

Presented below is information related to equipment owned by Davis Company at December 31, 2020.

Cost $6,750,000

Accumulated depreciation to date 750,000

Expected future net cash flows 5,250,000

Fair value 3,600,000

Assume that Davis will continue to use this asset in the future. As of December 31, 2020, the equipment has a remaining useful life of 4 years.

Assume the same information as above, except that Davis intends to dispose of the equipment in the coming year.

Instructions

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2020.

(b) Prepare the journal entry (if any) to record depreciation expense for 2021.

(c) The asset was not sold by December 31, 2021. The fair value of the equipment on that date is $3,975,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Answer 1

a
	Debit	Credit
Loss on impairment	2400000
Accumulated depreciation-Equipment		2400000
b
	Debit	Credit
No entry	0
No entry		0
c
	Debit	Credit
Accumulated depreciation-Equipment	375000
Recovery of loss on Impairment		375000
Workings:
Cost	6750000
Less: Accumulated depreciation	750000
Carrying Amount	6000000
Less: Fair value	3600000
Loss on impairment	2400000
No depreciation is recorded on assets intended to be disposed off
Fair value, Revised	3975000
Less:Fair value, before	3600000
Recovery of loss on Impairment	375000