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Chapter 11: Q12IFRS (page 608)

Assume the same information as in IFRS11-11, except that Pujols intends to dispose of the equipment in the coming year.

Cost (residual value \(0)

\)9,000,000

Accumulated depreciation to date

1,000,000

Value-in-use

5,500,000

Fair value less cost of disposal

4,400,000

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry (if any) to record depreciation expense for 2018.
  3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,100,000. Prepare the journal entry (if any) necessary to record this increase. It is expected that the cost of disposal is \)20,000.

Short Answer

Expert verified
  1. Loss on impairment is $3,600,000.
  2. There will be no journal entry to record depreciation expense for 2018.
  3. Recovery of the impairment loss is $680,000.

Step by step solution

01

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

(a) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2017

Loss on Impairment

3,600,000

Accumulated Depreciation

Equipment

3,600,000

Working Notes:

Calculation of the loss on impairment:

Cost

$9,000,000

Less: Accumulated depreciation

1,000,000

Carrying amount

8,000,000

Less: Fair value less the cost of disposal

4,400,000

Loss on impairment

$3,600,000

03

(b) Explaining journal entry

Depreciation is not taken on assets intended to be sold. So, there is no need to pass any journal entry to record the depreciation expense for 2018.

04

(c) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2018

Accumulated Depreciation-Equipment

680,000

Recovery of Impairment Loss

680,000

Working Notes:

Calculation of the recovery of impairment loss:

Fair value

$5,100,000

Less: Costs of disposal

20,000

5,080,000

Less: Carrying amount

4,400,000

Recovery of loss on impairment

$680,000

Calculation of the carrying amount:

Carrying amount = Cost - Accumulated depreciation - Loss on Impairment

= $9,000,000 - $1,000,000 - $3,600,000

= $4,400,000

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Most popular questions from this chapter

(Depreciation Computation鈥擱eplacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for \(31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was \)200, and \(500 was expended to install it. The machine鈥檚 useful life was estimated at 10 years, with a salvage value of \)2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of \(1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2019, the company buys a new machine of greater capacity for \)35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of \(20,000. To prepare the old machine for removal from the plant cost \)75, and expenditures to install the new one were \(1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of \)4,000 at the end of that time. (The exchange has commercial substance.)

Instructions

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round to the nearest dollar.)

(Depreciation Computations鈥擣ive Methods, Partial Periods) Muggsy Bogues Company purchased equipment for \(212,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of \)12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2017, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.

Instructions

Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.

  1. Straight-line method for 2017.
  2. Activity method (units of output) for 2017.
  3. Activity method (working hours) for 2017.
  4. Sum-of-the-years鈥�-digits method for 2019.
  5. Double-declining-balance method for 2018.

Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements. Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.

Wal-Mart Stores, Inc. in 2014 reported net income of \(16.4 billion, net sales of \)482.2 billion, and average total assets of $204.2 billion. What is Wal-Mart鈥檚 asset turnover? What is Wal-Mart鈥檚 return on assets?

The plant manager of a manufacturing firm suggested in a conference of the company鈥檚 executives that accountants should speed up depreciation on the machinery in the finishing department because improvements were rapidly making those machines obsolete, and a depreciation fund big enough to cover their replacement is needed. Discuss the accounting concept of depreciation and the effect on a business concern of the depreciation recorded for plant assets, paying particular attention to the issues raised by the plant manager.
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