Question

Question: Assume a company’s equipment carries a book value of \(16,000 (\)16,500 cost less \(500 accumulated depreciation) and a fair value of \)14,750, and that the \(1,250 decline in fair value in comparison to the book value meets the impairment test. Prepare the entry to record this \)1,250 impairment.

Short answer

The Impairment loss is debited by $1,250, and Accumulated depreciation equipment is credited by $1,250.

Step-by-step solution

Meaning

Plant assets are reported on a balance sheet at their undepreciated costs (book value), not at fair (market) values. An exception is when there is a permanent decline in the fair value of an asset relative to its book value, called an asset impairment. In this case, the company writes the asset down to this fair value (details on impairment loss are in advanced courses). Impairment costs are treated under the accumulated depreciation account

Asset impairment

Impairment of assets means a sudden fall or reduction in the value of an asset because of internal or external factors.

Entry to record the impairment

Impairment loss	$1,250
Accumulated depreciation equipment		$1,250
Record impairment loss