Question

Presented below is information related to equipment owned by Pujols Company at December 31, 2017.

Cost (residual value \(0)	\)9,000,000
Accumulated depreciation to date	1,000,000
Value-in-use	5,500,000
Fair value less cost of disposal	4,400,000

Assume that Pujols will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.

Instructions

1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
2. Prepare the journal entry to record depreciation expense for 2018.
3. The recoverable amount of the equipment at December 31, 2018, is $6,050,000. Prepare the journal entry (if any) necessary to record this increase.

Short answer

Answer

1. Loss on impairment is $2,500,000.
2. Depreciation expense is $687,500.
3. Recovery of the impairment loss is $1,237,500.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation can be stated as a decline in the value of an asset over a useful period. All assets depreciate over time, except for land, whose value increases with time. Among various depreciation methods, straight-line depreciation is considered the simplest and error-free method.

(a) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2017	Loss on Impairment	2,500,000
	Accumulated Depreciation Equipment		2,500,000

Working Notes:

Calculation of loss on impairment

Cost	$ 9,000,000
Less: Accumulated depreciation	1,000,000
Carrying amount	8,000,000
Less: Value-in-use	5,500,000
Loss on impairment	$ 2,500,000

(b) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2018	Depreciation Expense	687,500
	Accumulated Depreciation Equipment		687,500

Working notes:

Calculation of depreciation expense

$\begin{array}{c}\text{Depreciation}=\frac{\text{New\hspace{0.17em}carrying\hspace{0.17em}amount}}{\text{Useful\hspace{0.17em}life}}\\ =\frac{\$5,500,000}{8}\\ =\$687,500\end{array}$

(c) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2018	Accumulated Depreciation-Equipment	1,237,500
	Recovery of Impairment Loss		1,237,500

Working Notes:

Calculation of recovery of impairment loss

Recoverable amount	$6,050,000
Cost $9,000,000
Less: Accumulated depreciation 4,187,500	(4,812,500)
Recovery of impairment loss	$1,237,500

Note: The full amount is recovered because the revised carrying amount is still less than the carrying amount under the original cost ($9,000,000 – $1,000,000).