Roland Company uses special strapping equipment in its packaging business. The e
ID: 2460343 • Letter: R
Question
Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2013 for $16,500,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2014, new technology was introduced that would accelerate the obsolescence of Roland’s equipment. Roland’s controller estimates that expected future net cash flows on the equipment will be $10,395,000 and that the fair value of the equipment is $9,240,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straightline depreciation. (a) Prepare the journal entry (if any) to record the impairment at December 31, 2014. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit Dec. 31 (b) Prepare the journal entry for the equipment at December 31, 2015. The fair value of the equipment at December 31, 2015, is estimated to be $9,735,000. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit Dec. 31 (c) Prepare the journal entry (if any) to record the impairment at December 31, 2014 and for the equipment at December 31, 2015, assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2015. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 12/31/14 12/31/15
Explanation / Answer
Answer: a)
Accumulated Depreciation for two years = (16,500,000/8)*2 = 4125000
Carrying value of the asset as on 31 december 2014 = 16500000 - 4125000 = 12375000
Future cash flow (10,395,000) < carrying value (12375000)
Loss on impairment = 12375000 - 9240000 = 3135000
Impairment entry:
Loss on impairment Dr.3135000
To accumulated depreciation 3135000
Answer: b) Depreciation expense = 9,240,000/4 = 2310000
Entry:
Depreciation expense Dr. 2310000
To accumulated depreciation 2310000
Answer: c)
No entry is recorded on impaired assets to be disposed of. Recovery of impairment losses are recorded.
12/31/14 Loss on impairment Dr.3135000
To accumulated depreciation 3135000
12/31/15 Accumulated depreciation Dr. 495000
To recovery of impairment loss (9,735,000-9,240,000) 495000
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