on July 1, Ziebart company purchases equipment for $ 220,000, the equipment has
ID: 2452126 • Letter: O
Question
on July 1, Ziebart company purchases equipment for $ 220,000, the equipment has an estimated useful life of 10 years and an expected salvage value of $ 25,000. the company uses straight-line depreciation. Four years later, economic factors cause the fair value of the equipment to decline to 85,000. On this date, Ziebart examines the equipment for impairment and estimates $ 115,000 In undiscounted expected cash inflows from this equipment.
A- compute annual depreciation expense relating to this equipment
B- Compute the equipment's net book value at the end of the fourth year
C- apply the test of impairment to this equipment as the end of the fourth year, is the equipment impaired? show supporting computations
D- if the equipment is impaired at the end of the fourth year, compute the impairment loss
Explanation / Answer
A- compute annual depreciation expense relating to this equipment
Annual depreciation expense relating to this equipment = (cost-salvage Value)/useful life
Annual depreciation expense relating to this equipment = (220000-25000)/10
Annual depreciation expense relating to this equipment = 19500
B- Compute the equipment's net book value at the end of the fourth year
Equipment's net book value at the end of the fourth year = Cost - Accumulated depreciation expense
equipment's net book value at the end of the fourth year = 220000 - 19500*4
equipment's net book value at the end of the fourth year = 142000
C- apply the test of impairment to this equipment as the end of the fourth year, is the equipment impaired? show supporting computations
Carrying Amount as the end of the fourth year = $ 142000
Recoverable Amount = Higher of Fair value & Present Value of Future net cash Flow
Recoverable Amount = $ 85000
If the carrying amount exceeds the recoverable amount, an impairment expense amounting to the difference is recognized in the period. If the carrying amount is less than the recoverable amount no impairment is recognized.
Yes, The Equipment is impaired.
D- if the equipment is impaired at the end of the fourth year, compute the impairment loss
Impairment loss = Carrying Amount - Recoverable Amount
Impairment loss = 142000-85000
Impairment loss = $ 57000
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