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Q11-8BE

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 594

Short Answer

Jurassic Company owns equipment that cost $900,000 and has accumulated depreciation of $380,000. The expected future net cash flows from the use of the asset are expected to be $500,000. The fair value of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.

Answer

Impairment loss = $120,000

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Meaning of Impairment

The term "impairment" refers to a reduction of the market value of fixed or intangible assets, indicative of a reduction in the quantity, quality, or market value of an asset. The idea is that an asset should never be reported in your business's financial statements above the maximum amount that could be recouped through its sale.

Step 2: Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Loss on Impairment

120,000

Accumulated Depreciation

Equipment

120,000

Working notes:

Calculating accumulated depreciation

Note: Recoverability test

Future net cash flows ($500,000) are less than the Carrying amount ($520,000); therefore, the asset has been impaired.

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