Question

Presented below is information related to equipment owned by Monty Company at December 31, 2017.

Cost (residual value $0) $8,943,400
Accumulated depreciation to date 991,000
Value-in-use 5,524,100
Fair value less cost of disposal 4,361,570
Assume that Monty intends to dispose of the equipment in the coming year. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Monty uses straight-line depreciation.
Required :
1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
2. Prepare the journal entry to record depreciation expense for 2018.

Answer 1

Question 1: DR Profit & Loss Account $2,428,300

CR Equipment $2,428,300

Question 2: DR Depreciation Expense $690,512.50

CR Accumulated Depreciation $690,512.50

Step-by-step explanation:

Question 1)

DR Profit & Loss Account $2,428,300

CR Equipment $2,428,300

IAS 36 – Impairment of Assets states that the assets is considered to be impaired if the Carrying Amount of an asset is greater than the Recoverable Amount. Recoverable Amount of an assets is the higher of Fair Value less Cost to Sell and Value-in-Use.

In case of Monty Company, recoverable amount of Equipment will be $5,524,100 i.e. Value-in-Use as it is greater than the Fair Value les cost to sell. The carrying amount of Equipment $7,952,400 ($8,943,400 - $991,000 = $7,952,400) exceeds the recoverable amount $5,524,100, Therefore, the asset is considered impaired and must be written down by $2,428,300 ($7,952,400 - $5,524,100 = $2,428,300). The impairment loss is charged to the statement of profit and loss.

Question 2)

DR Depreciation Expense $690,512.50

CR Accumulated Depreciation $690,512.50

Once the asset is impaired, the recoverable amount of the asset is then depreciated over the remaining useful life of the asset. In case of Monty Company, depreciation charge for equipment in 2018 will be ($5,524,100 ÷ 8 = $690,512.50)