Final answer:
An impairment loss is recognized if the equipment's expected future net cash flows are less than its carrying amount. The loss is measured as the difference between the carrying amount and the fair value less costs to sell. The journal entry involves debiting a loss account and crediting the accumulated depreciation account, if an impairment has occurred.
Step-by-step explanation:
To determine if an impairment loss should be recognized for equipment, Sheffield Company needs to compare the equipment's carrying amount (book value) to the sum of the expected future net cash flows from the use and eventual disposal of the equipment. If the expected future net cash flows are less than the carrying amount, an impairment loss should be recognized for the amount by which the carrying value exceeds the net cash flows.
Since the cost of disposal is known ($23,400), and we assume that the expected net cash flows are less than the carrying amount as is often the case when considering impairment, Sheffield Company would record the impairment loss as follows:
- Determine the impairment loss amount, which is the difference between the equipment's carrying amount and its fair value less costs to sell.
- Record the impairment loss by debiting a loss account and crediting the accumulated depreciation account.
The journal entry would thus look like this, assuming an impairment loss has been determined:
Dr Loss on Impairment (Amount)
Cr Accumulated Depreciation—Equipment (Amount)
If no impairment loss is required (meaning the net cash flows exceed the carrying amount), then no journal entry is made.