Mueller Company purchased equipment 8 years ago for $1,000,000. The equipment ha

Question

Mueller Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Mueller's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment. The management of Mueller Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $80,000 per year. The present value of the net cash flow is $490,000. The fair value of the equipment is $240,000. 1.) Determine if an impairment loss should be recognized 2.) Determine the amount of the loss and prepare the journal entry to record the loss. 3.) How w

Explanation / Answer

Details Amt $         1 Equipment Purchase Cost        1,000,000 Residual Value@10%            100,000 Depreciable value              900,000 Useful Life in years                       20 SL depreciation per year              45,000 SL depreciation in 8 years=            360,000 Book Value of Equipment Now=            640,000 Fair Value              240,000 PV of net Cash flow from the asset            490,000 (assuming sales vale alos included in the amount given ) Greater of Fair Value /PV pf Cash inflows=            490,000 Recoverable Amount =490000 So Carrying Amount $640,000 is greater than the recoverable amount $490,000 So Impairment loss is to be recognized.         2 Amount of Impairment = $640,000-$490,000= $        150,000 Journal Entry   Account Title Dr $ Cr $ Impairment Loss-(Income Statement)            150,000 Allowance for Asset Impairment             150,000

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