Question

Bison Transportation has a December 31 year end and uses straight-line depreciation for all
property, plant and equipment. On July 1, 2012, the company purchased equipment on account for
$500,000. The equipment had an expected useful life of 10 years and no residual value.
On December 31, 2015, after recording depreciation, Bison reviewed its equipment for possible
impairment. Bison determined that the equipment had a recoverable amount of $225,000.
a) Prepare the journal entries to record the asset purchase in 2012 and to record the depreciation
expense at the end of 2012.
b) Determine if there is an impairment loss at December 31, 2015, and if any, prepare a journal
entry to record it.
c) Calculate and record the depreciation expense for 2016 (round to nearest dollar).

Answer 1

Ans- Calculation of Depreciation-

Depreciation= Purchase Price -Salvage Value/ Useful life

= $500,000-0/ 10

$50,000

Depreciation for December 31, 2015= $50,000*3.5 years

=$175,000

Compute impairment loss on equipment:-

Particulars	Amount ($)
Book Value of equipment	500,000
Accumulated depreciation	175,000
Carrying value	325,000 ($500,000-$175,000)
Fair Value	225,000
Impairment loss	100,000 ($325,000-$225,000)

Journal Entries

Date	Account Title and Explanation	Debit ($)	Credit ($)
2012
July 1	Cash A/c Dr.	500,000
	Equipment A/c		500,000
	(To record the purchase of equipment)
Dec.31	Depreciation Expenses A/c Dr. ($50,000*6/12)	25,000
	Accumulated Depreciation A/c		25,000
	(To record the depreciation at the end of 2012)
Dec.31 , 2015	Impairment Loss A/c Dr.	100,000
	Equipment A/c		100,000
	(To record the impairment loss on equipment)
Dec,31,2016	Depreciation Expenses A/c Dr. ($225,000/6 years)	37,500
	Accumulated Depreciation A/c		37,500
	(To record the depreciation at the end of 2016)