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Chapter 11: Q11-3IFRS (page 606)

Toro Co. has equipment with a carrying amount of \(700,000. The value-in-use of the equipment is \)705,000, and its fair value less costs of disposal is $590,000. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?

Short Answer

Expert verified

Answer

No measurement of loss is made or recognized even though the fair value is only $590,000.

Step by step solution

01

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.

02

Explaining the amount that should be reported by Toro

If the carrying amount of the asset exceeds the recoverable amount of the asset after performing the impairment test, the asset is said to be impaired. Because the value-in-use of $705,000 exceeds the carrying amount of the equipment ($700,000), no impairment is anticipated; therefore, even if the fair value is only $590,000, no loss assessment or recognition is performed.

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Most popular questions from this chapter

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

(Depreciation for Partial Periods—SL, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for \(90,000. The machine has an estimated salvage value of \)6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.

Instructions

(a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods.

  1. Straight-line method.
  2. Activity method.
  3. Sum-of-the-years’-digits method.
  4. Double-declining-balance method.

(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods.

  1. Straight-line method.
  2. Sum-of-the-years’-digits method.
  3. Double-declining-balance method

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.

(Depreciation for Partial Period—SL, SYD, and DDB) Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.

Price

\(85,000

Credit terms

2/10, n/30

Freight-in

\) 800

Preparation and installation costs

\( 3,800

Labor costs during regular production operations

\)10,500

It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2017. Alladin uses the calendar year as the basis for the preparation of financial statements.

Instructions

  1. Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
    1. Straight-line method for 2017.
    2. Sum-of-the-years’-digits method for 2018.
    3. Double-declining-balance method for 2017.
  2. Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?

(Depletion Computations—Oil) Diderot Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of \(55 per barrel. Total oil resources of this property are estimated to be 250,000 barrels.

The lease provided for an outright payment of \)500,000 to the lessor (owner) before drilling could be commenced and an annual rental of \(31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Diderot (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is \)30,000.

Instructions

From the provisions of the lease agreement, you are to compute the cost per barrel for the past year, exclusive of operating costs, to Diderot Drilling Company. (Round to the nearest cent.)
See all solutions

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