Question

Assume the same information as in IFRS11-11, except that Pujols intends to dispose of the equipment in the coming year.

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

Instructions

1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
2. Prepare the journal entry (if any) to record depreciation expense for 2018.
3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,100,000. Prepare the journal entry (if any) necessary to record this increase. It is expected that the cost of disposal is \)20,000.

Short answer

1. Loss on impairment is $3,600,000.
2. There will be no journal entry to record depreciation expense for 2018.
3. Recovery of the impairment loss is $680,000.

Step-by-step solution

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.

(a) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2017	Loss on Impairment	3,600,000
	Accumulated Depreciation Equipment		3,600,000

Working Notes:

Calculation of the loss on impairment:

Cost	$9,000,000
Less: Accumulated depreciation	1,000,000
Carrying amount	8,000,000
Less: Fair value less the cost of disposal	4,400,000
Loss on impairment	$3,600,000

(b) Explaining journal entry

Depreciation is not taken on assets intended to be sold. So, there is no need to pass any journal entry to record the depreciation expense for 2018.

(c) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2018	Accumulated Depreciation-Equipment	680,000
	Recovery of Impairment Loss		680,000

Working Notes:

Calculation of the recovery of impairment loss:

Fair value	$5,100,000
Less: Costs of disposal	20,000
	5,080,000
Less: Carrying amount	4,400,000
Recovery of loss on impairment	$680,000

Calculation of the carrying amount:

Carrying amount = Cost - Accumulated depreciation - Loss on Impairment

= $9,000,000 - $1,000,000 - $3,600,000

= $4,400,000