Question

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

Answer

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

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.

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.