Dolphin Company uses special strapping equipment in its packaging business. The

Question

Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2013 for $8,000,000 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 Dolphin's equipment. Dolphin's controller estimates that expected future net cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is $4,400,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dolphin uses straight-line depreciation.

What is the depreciable base of the asset at the end of 2nd year?

*Note: The answer does not seem to be 6,000,000. I have tried that.

Explanation / Answer

Recoverable amount is defined as the higher of fair value less costs to sell or valuein-use. Fair value less costs to sell means what the asset could be sold for after deducting costs of disposal. Value-in-use is the present value of cash flows expected from the future use and eventual sale of the asset at the end of its useful life.

Dolphin's controller estimates that expected future net cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is $4,400,000. As the Value in use (expected future net cash flows on the equipment) is greater than the fair value of the equipment, the depreciable base of the asset at the end of 2nd year will be $5000000.

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