Chapter 11: Q4Q (page 582)
Explain how estimation of service lives can result in unrealistically high carrying values for fixed assets.
Answer
Charges for depreciation and accumulated depreciation should be reduced.
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What is a modified accelerated cost recovery system (MACRS)? Speculate as to why this system is now required for tax purposes.
(Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be \(20,000.
Cost | \)9,000,000 |
Accumulated depreciation to date | 1,000,000 |
Expected future net cash flows | 7,000,000 |
Fair value | 4,800,000 |
Instructions
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
A building that was purchased on December 31, 2003, for $2,500,000 was originally estimated to have a life of 50 years with no salvage value at the end of that time. Depreciation has been recorded through 2017. During 2018, an examination of the building by an engineering firm discloses that its estimated useful life is 15 years after 2017. What should be the amount of depreciation for 2018?
Toro Co. has equipment with a carrying amount of \(700,000. The expected future net cash flows from the equipment are \)705,000, and its fair value 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?
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