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Chapter 11: Q11-1IFRS (page 606)

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

Short Answer

Expert verified

Answer

To determine whether an asset is impaired, companies review the asset for indications of impairment; that is, a decline in the asset鈥檚 cash-generating ability through use or sale.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Impairment

Impairment refers to a reduction of the market value of fixed or intangible assets, indicative of a reduction in the quantity, quality, or market value of an asset. The idea is that an asset should never be reported in a business's financial statements above the maximum amount that could be recouped through its sale.

02

Explanation to the management of Walkin on how to determine whether a write-down method is permitted or not.

Companies examine assets on a yearly basis for signs of impairment, such as a deterioration in the asset's capacity to generate cash through use or sale, to decide if it is impaired. An asset is impaired if the recoverable value is less than the carrying amount.

The impairment loss is calculated as the difference between an asset's carrying value and its recoverable value. The greater fair value minus costs to sell or value-in-use is the recoverable amount of assets.

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Most popular questions from this chapter

Cominsky Company purchased a machine on July 1, 2018, for \(28,000. Cominsky paid \)200 in title fees and county property tax of \(125 on the machine. In addition, Cominsky paid \)500 shipping charges for delivery, and \(475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of \)3,000. Determine the depreciation base of Cominsky鈥檚 new machine. Cominsky uses straightline depreciation.

(Depreciation鈥擟hange in Estimate) Machinery purchased for \(60,000 by Tom Brady Co. in 2013 was originally estimated to have a life of 8 years with a salvage value of \)4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2018, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.

Instructions

  1. Prepare the entry to correct the prior years鈥� depreciation, if necessary.
  2. Prepare the entry to record depreciation for 2018.

For what reasons are plant assets retired? Define inadequacy, supersession, and obsolescence.

(Impairment) Presented below is information related to equipment owned by Suarez Company at December 31, 2017.

Cost

\(9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Assume that Suarez will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry to record depreciation expense for 2018.
  3. The fair value of the equipment at December 31, 2018, is \)5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Jurassic Company owns equipment that cost \(900,000 and has accumulated depreciation of \)380,000. The expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.
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