Question

(3 points) The management of Balboa Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $825,000 with depreciation to date of $400,000 as of December 31, 2014. On December 31, 2014, management projected its future net cash flows from this equipment to be $390,000 and its fair value to be $365,000. The company intends to use this equipment in the future. Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2014. g

Answer 1

Impairment Loss $35,000 (debit)

Accumulated Impairment Loss $35,000 (credit)

Step-by-step explanation:

Impairment of an Asset occurs when the Carrying Amount of an Asset exceed its Recoverable Value.

Carrying Amount Calculation

Carrying Amount = Cost - Accumulated Depreciation

= $825,000 - $400,000

= $ 425,000

Recoverable Value Determination

Recoverable Value of an Asset is the Higher of

1. Value in use of the Asset and,
2. Fair Value less Cost to sell

Value in Use of the Asset = $390,000

Fair Value Less Cost to Sell = $365,000

Therefore, the Recoverable Amount is $390,000

Impairment Analysis

Carrying Amount, $ 425,000 > Recoverable Amount $390,000.

Therefore the Equipment is Impaired

Impairment loss is $35,000

Journal

Impairment Loss $35,000 (debit)

Accumulated Impairment Loss $35,000 (credit)