Question

Presented below is information related to equipment owned by Novak Company at December 31, 2020.

Cost $11,250,000
Accumulated depreciation to date 1,250,000
Expected future net cash flows 8,750,000
Fair value 6,000,000

Assume that Novak will continue to use this asset in the future. As of December 31, 2020, the equipment has a remaining useful life of 4 years.

Required:
Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2020.

Answer 1

Debit : Impairment loss $1,250,000

Credit : Accumulated impairment loss $1,250,000

Step-by-step explanation:

Impairment of an asset happens when, the Carrying Amount of an Asset is greater than the Net Realizable Value of an asset.

Carrying Amount is Cost of asset less Accumulated depreciation. Carrying Amount for the equipment is $10,000,000 ($11,250,000 - $1,250,000).

The Net Realizable Value of an asset is the higher of Fair Value of Asset and Future Value. For the equipment the Net Realizable Value is $8,750,000

Then, since Carrying Amount ($10,000,000) > Net Realizable Value ($8,750,000), the equipment is impaired.

Impairment loss will be $1,250,000 ($10,000,000 - $8,750,000).

The journal entry to record the impairment loss would be :

Debit : Impairment loss $1,250,000

Credit : Accumulated impairment loss $1,250,000