Question

On January 1, 2018, Mr. Brightside Company purchased machinery costing $146,000 and incurred $5,000 in installation costs. The machinery has an estimated useful life of 15 years and a residual value of $10,000. The company uses the straight-line method of depreciation. At the end of 2019, Mr. Brightside recorded depreciation and assessed the asset, determining a recoverable amount of $122,000. Mr. Brightside sold the equipment to When You Were Young Corporation on June 30, 2020, for $120,000. Prepare the necessary entries for 2019 and 2020 assuming Mr. Brightside has a December 31 year-end.

Answer 1

Impairment loss is the amount by which the assets carrying value is in excess of recoverable amount Carrying Amount is the amount at which the assets are reported in the balance sheet after deducting depreciation and impairment loss if any Recoverable amount is higher of the assets fair value less cost sale those assets and its value in use. Value in use means the present value of the future cash flow generated from the asset. Impairment test is done when there is an indication of the asset may be have impaired except in case of goodwill and intangible assets with indefinite useful live which is be done annually. Step 1 Straight Line Depreciation = (Cost - Salvage Value)/Useful Life Depreciation per year [(($146000+$5000) $10000)/15] $9,400 Cost $1,51,000 Less: Depreciation for 2018 ($9,400) Carrying Value as on January 1st, 2019 $1,41,600 Less: Depreciation for 2019 ($9,400) Carrying Value as on December 31st, 2019 $1,32,200 Step 2 Calculate the impairment loss Recoverable amount $1,22,000 $10,200 Credit Impairment loss = Carrying Value less Recoverable amount Impairment loss = ($132200-122000] $10,200 The equipment is impaired at Decemeber 31, 2019 Journal Entry Date Particulars Debit Dec 31, 2019 Depreciation Expense $9,400 Accumulated Depreciation - Machinery (To Record impairment loss) July 1 2016 Impairment Loss $10,200 Equipment To Record impairment loss) $9,400 $10,200

$1,22,000 13.00 $4,308 Credit Debit $4,308 Step 3 Revised carrying value Remaining useful life [15-2] Depreciation ((($122000-$10000)/13/12x6] Journal Entry for Depreciation Expense till June 30, 2020 Date Particulars June 30 2020 Depreciation Expense Accumulated Depreciation - Machinery (To Record depreciation) June 30 2020 Cash Accumulated Depreciation - Machinery Gain on Sale of Machinery Machinery (To record sale of machinery) $4,308 $1,20,000 $23,108 $21,108 $1,22,000