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On January 1, 2010, Desert Company purchased a machine for $820,000. At the time, management estimated the useful life to be 20 years with a salvage value of $80,000 and will use straight-line depreciation.
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42 votes
42 votes
On January 1, 2010, Desert Company purchased a machine for $820,000. At the time, management estimated the useful life to be 20 years with a salvage value of $80,000 and will use straight-line depreciation. On January 1, 2020, the company reviewed the asset for impairment and determined that its future net cash flows totaled $420,000 and its fair value was $360,000. Desert has decided to continue to use the machine. What is the amount of depreciation expense Desert will record for this machine in 2020 after accounting for any potential impairment?

User MigMit
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1 Answer

13 votes
13 votes

Answer:

$42,000

Step-by-step explanation:

Straight line depreciation charges a fixed amount of depreciation for the period the asset is used in the business.

Depreciation Expense = Cost - Salvage Value ÷ Estimated Useful Life

January 1, 2020

Carrying Amount

Cost - Accumulated depreciation = $450,000

Recoverable Amount :

Higher of Fair Value and Future Cash Flows

Recoverable Amount = $420,000

Impairment loss incurs when Carrying Amount > Recoverable Amount

therefore,

Impairment loss = $30,000

December 31 , 2020

Depreciation expense = New Depreciable Amount ÷ Remaining useful life

= $420,000 ÷ 10

= $42,000

User Vitalygolub
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