Question

(Impairment) Presented below is information related to equipment owned by Suarez Company at December 31, 2017.

Cost	\(9,000,000
Accumulated depreciation to date	1,000,000
Expected future net cash flows	7,000,000
Fair value	4,800,000

Assume that Suarez will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.

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 fair value of the equipment at December 31, 2018, is \)5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Short answer

Answer

1. Loss on impairment = $3,200,000
2. Depreciation = $1,200,000
3. No entry required

Step-by-step solution

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.

(a) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2017	Loss on Impairment	3,200,000
	Accumulated Depreciation Equipment		3,200,000

Working Notes:

Calculating loss on impairment

Cost	$9,000,000
Less: Accumulated depreciation	1,000,000
Carrying amount	8,000,000
Less: Fair value	4,800,000
Loss on impairment	$3,200,000

(b) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2018	Depreciation Expense	1,200,000
	Accumulated Depreciation Equipment		1,200,000

Working notes:

Calculating depreciation expense

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{New}\text{carrying}\text{amount}}{\text{Useful}\text{life}}\\ & =& \frac{\$4,800,000}{4}\\ & =& \$1,200,000\end{array}$

(c) Explaining the journal entry 

It is not possible to restore any impairment loss. Therefore, no entry should be passed.

Profit or loss is instantly adjusted to reflect an impairment loss. The asset's (or cash-generating units) carrying amount is decreased. Goodwill is lowered first in a cash-generating unit, followed by other assets on a pro-rata basis. In future periods, the depreciation (amortization) charge is adjusted to allocate the asset's revised carrying amount over the asset's remaining useful life.