Question

The management of Petro Garcia 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 $900,000 with depreciation to date of $400,000 as of December 31, 2017. On December 31, 2017, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future. Prepare the journal entry (if any) to record the impairment at December 31, 2017 At December 31, 2018, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.

Answer 1

Step-by-step explanation:

Part A.

December 31, 2017

Dr Impairment Loss $200,000

Cr Accumulated Depreciation $200,000

The International Accounting Standard IAS 36 Impairment of assets says that the capital asset must only be impaired if the carrying value of the asset is higher than the recoverable value.

Mathematically,

Impairment of Asset = Carrying Value of the asset - Recoverable Value

Note. Always remember that the impairment of the asset is never negative.

Recoverable value of the asset is higher of:

1. Fair value less cost to sell which in this case is $230,000
2. Value in use which is $300,000 here

The recoverable amount is $300,000 and the carrying value of the asset is $500,000 ($900,000 - $400,000).

By putting the values in the above equation, we have:

Impairment Cost = $500,000 - $300,000 = $200,000

The accounting entry of the impairment would be as under:

Dr Impairment Loss $200,000

Cr Accumulated Depreciation $200,000

Part B.

The recoverable value remains $300,000 though the fair value increases to $260,000 because recoverable value of the asset is higher of:

1. Fair value less cost to sell which in this case is $260,000
2. Value in use which is $300,000 here

So their is no additional impairment and always remember that the impairment loss is never reversed which means if the fair value increased to $500,000 then the impairment already charged can not be reversed.