Question

Jurassic Company owns machinery that cost \(900,000 and has accumulated depreciation of \)380,000. The present value of expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value less cost of disposal of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.

Short answer

Answer

Loss on impairment is $20,000.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Impairment

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.

Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
	Loss on Impairment	20,000
	Accumulated Depreciation Machinery		20,000

Working notes:

Calculation of Impairment value

$\begin{array}{c}\text{Impairment}=\left(\text{Cost\hspace{0.17em}of\hspace{0.17em}machinery}-\text{Accumulated\hspace{0.17em}depreciation}\right)-\text{Present\hspace{0.17em}value}\\ =\left(\$900,000-\$380,000\right)-\$500,000\\ =\$520,000-\$500,000\\ =\$20,000\end{array}$

Note: Present value of future net cash flows* ($500,000) < Carrying amount ($520,000)*; therefore, the asset has been impaired. The impairment equals $20,000 ($520,000 – $500,000).

A recoverable amount is used because it is greater than fair value and has fewer costs to sell.