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20 June, 01:22

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?

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  1. 20 June, 02:03
    0
    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:

    Fair Value less Costs to sale or, 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)
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