Question

Kingbird Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $12,100,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2020, new technology was introduced that would accelerate the obsolescence of Kingbird's equipment. Kingbird's controller estimates that expected future net cash flows on the equipment will be $7,623,000 and that the fair value of the equipment is $6,776,000. Kingbird intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Kingbird uses straight-line depreciation. Prepare the journal entry (if any) to record the impairment at December 31, 2020.

Answer 1

FFinal answer:

Kingbird Company must record an impairment loss for the special strapping equipment due to new technology, which has accelerated obsolescence. The equipment's carrying amount is $9,075,000, exceeding the estimated future net cash flows of $7,623,000.

Step-by-step explanation:

The student has asked to prepare a journal entry to record the impairment of the strapping equipment as of December 31, 2020, in accordance with the relevant accounting standards. To assess impairment, we compare the carrying amount on the books with the recoverable amount, which is the higher of the asset’s fair value less costs to sell and its value in use (estimated future net cash flows). If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized.

As of December 31, 2020, we calculate the carrying amount as follows: $12,100,000 original cost - ($12,100,000/8 years * 2 years) = $9,075,000. The recoverable amount is the higher of $7,623,000 (value in use) and $6,776,000 (fair value). Hence, the recoverable amount is $7,623,000.

Since the carrying amount of $9,075,000 is higher than the recoverable amount, we need to recognize an impairment loss of $1,452,000 ($9,075,000 - $7,623,000). The journal entry would be:
Dr. Loss on Impairment $1,452,000
Cr. Accumulated Depreciation - Equipment $1,452,000