Jurassic Company owns machinery that cost $1,376,100 and has accumulated depreci

Question

Jurassic Company owns machinery that cost $1,376,100 and has accumulated depreciation of $581,020. The expected future net cash flows from the use of the asset are expected to be $764,500. The fair value of the machinery is $611,600.

Prepare the journal entry, if any, to record the impairment loss. (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.)

Account Titles and Explanation

Debit

Credit

Account Titles and Explanation

Debit

Credit

Explanation / Answer

Impairment loss =Carrying Amount- Recoverable Amount

Carrying amount =Plant at Cost -Depreciation

                           =$(1,376,100-581020)

                          =$795,080

Under US GAAP, asset impairment is tested in two steps

Step 1: Recoverability Test : If asset Carrying value > Undiscounted Cash Flows , asset is said to be impaired. In this case carrying value exceeds expected cash flows and hence asset is impaired

Step 2: Loss measurement: If asset is impaired , impairment loss = Carrying Value - Fair Value = 795080 - 611600 = 183480

Journal Entry :

Impairment Loss A/c Dr 183480

To Machinery A/c                       183480

( Being machinery written down to fair value)

Profit & Loss A/c Dr 183480

To Impairment Loss              183480

(Being impairment loss recognised in P/L)

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