Question

Presented below is information related to equipment owned by Bramble Company at December 31, 2020. $10,260,000 Cost Accumulated depreciation to date 1,140,000 7,980,000 Expected future net cash flows Fair value 5,472,000 Assume that Bramble will continue to use this asset in the future. As of December 31, 2020, the equipment has a remaining useful life of 5 years. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2020. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Date Credit Dec. 31 Prepare the journal entry to record depreciation expense for 202 1. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit eTextbook and Media List of Accounts The fair value of the equipment at December 31, 2021, is $5,8 14,000. Prepare the journal entry (if any) necessary to record this increase in fair value. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manual Account Titles and Explanation Credit Date Debit Dec. 31

Answer 1

To record the impairment of the asset, the journal entry would include a loss on impairment, reversal of accumulated depreciation, and a gain on asset restoration. The depreciation expense for 2021 is recorded with a debit to depreciation expense and a credit to accumulated depreciation. An increase in fair value is recorded as a gain on asset restoration in the revaluation surplus account.

Step-by-step explanation:

To record the impairment of the asset at December 31, 2020, the journal entry will be:

Account Titles and Explanation

Debit

Loss on Impairment 2,508,000

Debit

Accumulated Depreciation 1,140,000

Debit

Equipment 889,000

Credit

Gain on Asset Restoration 778,000

Credit

Revaluation surplus 1,730,000

This journal entry reflects the impairment of the equipment, which is the difference between the fair value and the carrying amount. It also includes the reversal of the accumulated depreciation and the recognition of a gain on asset restoration and revaluation surplus.

To record the depreciation expense for 2021, the journal entry will be:

Account Titles and Explanation

Debit

Depreciation Expense 1,596,000

Credit

Accumulated Depreciation 1,596,000

The depreciation expense is calculated by dividing the remaining carrying amount of the equipment by the remaining useful life.

To record the increase in fair value at December 31, 2021, the journal entry will be:

Account Titles and Explanation

Debit

Revaluation Surplus 342,000

Credit

Gain on Asset Restoration 342,000

This journal entry reflects the increase in fair value of the equipment and recognizes it as a gain on asset restoration in the revaluation surplus account.

Answer 2

An impairment loss should be recorded for the equipment since its carrying amount exceeds the expected future net cash flows. The loss would be $1,140,000 and the adjusted annual depreciation expense would be $1,596,000. No entry is required for the increase in fair value per US GAAP.

Step-by-step explanation:

The question involves evaluating whether an impairment loss should be recorded for a piece of equipment based on the accounting data provided and subsequently preparing any necessary journal entries according to the US GAAP framework. The criteria for recognizing an impairment loss involve comparing the carrying amount of the asset to the sum of the expected future net cash flows from the use of the asset. If the carrying amount exceeds the estimated future net cash flows, an impairment loss is recognized. In this case, the carrying amount of the equipment is $10,260,000 (cost) minus $1,140,000 (accumulated depreciation) = $9,120,000. Since the expected future net cash flows are $7,980,000, which is less than the carrying amount, an impairment loss should be recognized for the difference of $1,140,000 (carrying amount - future net cash flows).

To record this impairment, the journal entry on December 31, 2020, would be:

• Debit Loss on Impairment $1,140,000
• Credit Accumulated Depreciation $1,140,000

For the depreciation expense of 2021, assuming straight-line depreciation and no residual value, the adjusted carrying amount after impairment loss ($9,120,000 - $1,140,000 = $7,980,000) would be divided by the remaining useful life of 5 years to determine the annual depreciation expense, which is $7,980,000 / 5 = $1,596,000.

The journal entry for December 31, 2021, for the depreciation expense would be:

• Debit Depreciation Expense $1,596,000
• Credit Accumulated Depreciation $1,596,000

Regarding the fair value increase in 2021, US GAAP does not allow for the reversal of an impairment loss once it has been recognized for equipment used in operations. Therefore, no journal entry is required to record the fair value increase.