Question

As of December 31, 2020, the equipment had a salvage value of $4,000 and is expected to produce 100,000 additional units over its remaining useful life. Urithiru uses an activity-based depreciation method and the equipment produced 24,000 units in 2021. At December 31, 2021, the fair value of the equipment is $16,000 and the undiscounted expected future net cash flow is $18,000.

How much impairment loss or loss recovery would be recognized at 12/31/2021?

Answer 1

Hi, the question you have provided has missing information, however important principles are explained below :

Impairment loss is the excess of Carrying Amount of an asset over its Recoverable Amount.

Carrying Amount

Carrying Amount = Cost - Accumulated Depreciation

The question has missing information on the cost of the equipment.

However the formula to calculate depreciation is :

Depreciation Expense = (Cost - Salvage Value) × Activity during the year / Estimated Total Activity

Recoverable Amount

Is the higher of :

1. Fair Value less Costs to sale or,
2. Value in use (discounted expected future net cash flow)

The question provided an undiscounted expected future net cash flow of $18,000 which needs to be discounted using the company`s cost of capital to get the Value in use.

Then determine the recoverable amount.

Test for Impairment

If Carrying Amount > Recoverable Amount, then the asset is impaired

Journal Entry

Debit : Impairment loss expense with the amount of impairment (the excess)

Credit : Accumulated Impairment loss with the amount of impairment (the excess)