Question

Sheridan Company owns equipment that cost $963,000 and has accumulated depreciation of $406,600. The expected future net cash flows from the use of the asset are expected to be $535,000. The fair value of the equipment is $428,000.

Required:
Prepare the journal entry, if any, to record the impairment loss.

Answer 1

Debit : Impairment loss $21,400

Credit : Accumulated impairment loss $21,400

Step-by-step explanation:

An Asset is impaired when its Carrying Amount > Recoverable Amount

where,

Carrying Amount = Cost - Accumulated depreciation

therefore,

Carrying Amount = $963,000 - $406,600 = $556,400

and

Recoverable Amount is the higher of

1. Value in use = $535,000

2. Fair Value less cost to sell $428,000

therefore,

Recoverable Amount is $535,000

Conclusion :

Since, Carrying Amount ($556,400) > Recoverable Amount ($535,000), the asset is impaired.

Impairment loss = $21,400 ($556,400 - $535,000).