Question

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

Short answer

Answer

Impairment loss = $120,000

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Impairment

The term "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 your business's financial statements above the maximum amount that could be recouped through its sale.

Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Loss on Impairment	120,000
	Accumulated Depreciation Equipment		120,000

Working notes:

Calculating accumulated depreciation

$\begin{array}{c}\text{Accumulated\hspace{0.17em}depreciation}=\left(\text{Equipment\hspace{0.17em}cost}-\text{Accumulated\hspace{0.17em}depreciation}\right)-\text{Fair\hspace{0.17em}value}\\ =\left(\$900,000-\$380,000\right)-\$400,000\\ =\$520,000-\$400,000\\ =\$120,000\end{array}$

Note:Recoverability test

Future net cash flows ($500,000) are less than the Carrying amount ($520,000); therefore, the asset has been impaired.