Question

On January 1, 2014, Borstad Company purchased equipment for $1,180,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $400,000 and will incur cash outflows of $295,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstad's discount rate is 12% Required: 1. Prepare schedules to determine whether, at the end of 2019, the equipment is impaired and, if so, the impairment loss to be recognized. 2. Prepare the journal entry to record the impairment. 3. Next Level How would your answer to Requirement 1 change if the discount rate was 16% and the cash flows were expected to continue for 6 years? 4. Next Level How would your answer change if management planned to implement efficiencies that would save $10,000 each year? 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $570,000 and estimates that it would cost $17,000 to sell the equipment. How much would the company recognize as the impairment loss? 3. How would your answer to Requirement 1 change if the discount rate was 16% and the cash flows were expected to continue for 6 years? Additional Instructions if the discount rate was 16% and the cash flows were expected to continue for 6 years. Borstad Company would recognize a loss of Points 0/1 Feedback Check My Work Compare the book Value to the undiscounted expected cash flows.

Answer 1

Requirement 1- Computation of Impairment Loss Computation of PV of Future Cash Flows $ Cash inflows 4,00,000 $ () Cash outflows -2,95,000 Net Cash Inflow p.a $ 1,05,000 PV annuity (12%, 8 yrs) 4.96762 PV of Future Cash flows 5,21,600 Computation of Recoverable Value Higher of (a) PV of Future Cash Flows 5,21,600 (b) Fair Value 0 $ Hence, Recoverable Value is 5,21,600 Computation of Carrying amount of assets as per books Cost of Asset 11,80,000 (-) Residual Value 0 Depreciable Value 11,80,000 Useful Life 25 yrs Depreciation p.a 47,200 Accumulated Depreciation for 6 yrs $ 2,83,200 $ Carrying amount as on Dec 31, 2019 8,96,800 (1180000-283200) Since, Recoverable Loss is lower than the carrying amount of asset as on Jan 1, 2019 There is impairment loss for the asset. Carrying Amount - Recoverable amount Impairment Loss =896800-521600 = $375,200 Hence, Impairment loss is $ 375,200

Requirement 2 (in $ (in $) Journal Year end Particulars Debit Credit Impairment Loss Accumulated Impairment 2019 3,75,200 3,75,200 (To record impairment of asset)

Requirement 3- Computation of Impairment Loss Computation of PV of Future Cash Flows $ Cash inflows 4,00,000 ) Cash outflows Net Cash Inflow p.a $ -2,95,000 1,05,000 PV annuity (16%, 6 yrs) 3.68476 PV of Future Cash flows $ 3,86,900 Computation of Recoverable Value Higher of (a) PV of Future Cash Flows 3,86,900 (b) Fair Value 0 Hence, Recoverable Value is 3,86,900 Carrying amount as on Dec 31, 2019 8,96,800 Since, Recoverable Loss is lower than the carrying amount of asset as on Jan 1, 2019 There is impairment loss for the asset. Carrying Amount - Recoverable amount Impairment Loss =896800-386900 = $509,900 Hence, Impairment loss is $ 509,900

Requirement 4- Computation of Impairment Loss Computation of PV of Future Cash Flows Cash inflows 4,10,000 ( Cash outflows -2,95,000 1,15,000 Net Cash Inflow p.a S PV annuity (16%, 6 yrs) 3.68476 $ PV of Future Cash flows 4,23,747 Computation of Recoverable Value Higher of (a) PV of Future Cash Flows $ 4,23,747 (b) Fair Value 0 Hence, Recoverable Value is 4,23,747 8,96,800 Carrying amount as on Dec 31, 2019 Since, Recoverable Loss is lower than the carrying amount of asset as on Jan 1, 2019 There is impairment loss for the asset. =Carrying Amount Recoverable amount Impairment Loss =896800-423747 = $ 473,053 Hence, Impairment loss is $ 473,053

Requirement 5- Computation of Impairment Loss Computation of PV of Future Cash Flows Cash inflows 4,00,000 $ () Cash outflows -2,95,000 Net Cash Inflow p.a 1,05,000 PV annuity (12%, 8 yrs) 4.96762 PV of Future Cash flows 5,21,600 Computation of Recoverable Value Higher of $ (a) PV of Future Cash Flows 5,21,600 $ (b) Fair Value (570000-17000) 5,53,000 Hence, Recoverable Value is 5,53,000 $ Carrying amount as on Dec 31, 2019 8,96,800 Since, Recoverable Loss is lower than the carrying amount of asset as on Jan 1, 2019 C There is impairment loss for the asset. =Carrying Amount - Recoverable amount Impairment Loss = 896800-553000 = $ 343,800 Hence, Impairment loss is $ 343,800