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Chapter 11: Q9P (page 594)

(Impairment) Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for \(10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Roland鈥檚 equipment. Roland鈥檚 controller estimates that expected future net cash flows on the equipment will be \)6,300,000 and that the fair value of the equipment is \(5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation.

Instructions

  1. Prepare the journal entry (if any) to record the impairment at December 31, 2017.
  2. Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be \)5,900,000.
  3. Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.

Short Answer

Expert verified
  1. Accumulated depreciation = $1,900,000
  2. Accumulated depreciation = $1,400,000
  3. Recovery of loss from impairment = $300,000

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Impairment

The term "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

Particular

Debit ($)

Credit ($)

Loss on Impairment

1,900,000

Accumulated Depreciation

Equipment

1,900,000

Working notes:

Calculating carrying value

颁补谤谤测颈苍驳鈥塿补濒耻别=贰辩耻颈辫尘别苍迟鈥塩辞蝉迟鈭�贰辩耻颈辫尘别苍迟鈥塩辞蝉迟鲍蝉别蹿耻濒鈥塴颈蹿别脳2=$10,000,000鈭�$10,000,0008脳2=$10,000,000鈭�$2,500,000=$7,500,000

Note: Future cash flow ($6,300,000) < Carrying value ($7,500,000)

Calculating Accumulated depreciation

础肠肠耻尘耻濒补迟别诲鈥塪别辫谤别肠颈补迟颈辞苍=颁补谤谤测颈苍驳鈥塿补濒耻别鈭�贵补颈谤鈥塿补濒耻别鈥塷蹿鈥塭辩耻颈辫尘别苍迟=$7,500,000鈭�$5,600,000=$1,900,000

03

(b) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

1,400,000

Accumulated Depreciation

Equipment

1,400,000

Working notes:

础肠肠耻尘耻濒补迟别诲鈥塪别辫谤别肠颈补迟颈辞苍=贵补颈谤鈥塿补濒耻别鈥塷蹿鈥塭耻颈辫尘别苍迟搁别尘补颈苍颈苍驳鈥塽蝉别蹿耻濒鈥塴颈蹿别=$5,600,0004=$1,400,000

04

(c) Preparing journal entry

No depreciation is recorded on impaired assets to be disposed of. Recovery of impairment losses is recorded.

Date

Particular

Debit ($)

Credit ($)

12/31/17

Loss on Impairment

1,900,000

Accumulated Depreciation

Equipment

1,900,000

12/31/18

Accumulated Depreciation

Equipment

300,000

Recovery of Loss from

Impairment

300,000

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Most popular questions from this chapter

(Depletion and Depreciation鈥擬ining) Khamsah Mining Company has purchased a tract of mineral land for \(900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of \)30,000.

The company builds necessary structures and sheds on the site at a cost of \(36,000. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of \)60,000. This machinery cost the former owner $150,000 and was 50% depreciated when purchased. Khamsah Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.

Instructions

  1. As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for each year of the expected life of the mine.
  2. Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.

Falcetto Company acquired equipment on January 1, 2016, for \(12,000. Falcetto elects to value this class of equipment using revaluation accounting. This equipment is being depreciated on a straight-line basis over its 6-year useful life. There is no residual value at the end of the 6-year period. The appraised value of the equipment approximates the carrying amount at December 31, 2016 and 2018. On December 31, 2017, the fair value of the equipment is determined to be \)7,000.

Instructions

  1. Prepare the journal entries for 2016 related to the equipment.
  2. Prepare the journal entries for 2017 related to the equipment.

Determine the amount of depreciation expense that Falcetto will record on the equipment in 2018.

(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.

(Depreciation Computations鈥擣our Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was \(117,900. The company estimated that the machine would have a salvage value of \)12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2017.
  2. Activity method for 2017, assuming that machine usage was 800 hours.
  3. Sum-of-the-years鈥�-digits for 2018.
  4. Double-declining balance for 2018.

(Depreciation for Partial Period鈥擲L, SYD, and DDB) Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.

Price

\(85,000

Credit terms

2/10, n/30

Freight-in

\) 800

Preparation and installation costs

\( 3,800

Labor costs during regular production operations

\)10,500

It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2017. Alladin uses the calendar year as the basis for the preparation of financial statements.

Instructions

  1. Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
    1. Straight-line method for 2017.
    2. Sum-of-the-years鈥�-digits method for 2018.
    3. Double-declining-balance method for 2017.
  2. Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company鈥檚 depreciation expense to the early years and more to later years of the assets鈥� lives. What method would you recommend?
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