Mr. Brightside Corporation is a manufacturer of television accessories. Its capi

Question

Mr. Brightside Corporation is a manufacturer of television accessories. Its capital assets include specialized equipment that is being used in the finishing stage of its manufacturing process. The equipment was purchased in 2018 and is being depreciated using the units-of-production method. By December 31, 2019, the book (carrying) value was $430,000 (after depreciation expense had been recorded). However, at that time, Mr. Brightside became aware of new technology that would make the equipment obsolete within the next five years. An appraisal puts the equipment's future undiscounted net cash flows at $390,000 and its fair value at $300,000. While considering its options for the eventual replacement, Mr. Brightside will continue using the equipment, but will change to straight-line depreciation.

Required

Assuming Mr. Brightside is a private Canadian corporation,

1. Prepare the journal entry, if any, to record the impairment loss at December 31, 2019.

2. Prepare the journal entries to record 2020 and 2021 depreciation.

Explanation / Answer

1. Carrying amount = $430,000

Recoverable amount is lower of undiscounted net cash flows and fair value i.e., lower of $390,000 and $300,000

Therefore recoverable amount is $300,000

Impairment loss = carrying amount - Recoverable amount = $430,000 - $300,000 =$130,000

Journal entry is

Impairment loss account Dr. $130,000

To Equipment account $130,000

2. From next year Mr. Brightside is charging depreciation in straight line method on carrying value

Therefore deprecition for 2020, 2021 is $300,000/5 = $60,000

Journal entry for 2020, 201 is

Depreciation account Dr $60,000

To equipment account $60,000

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