Stellar Company owns equipment that cost $909,000 and has accumulated depreciati

Question

Stellar Company owns equipment that cost $909,000 and has accumulated depreciation of $383,800. The expected future net cash flows from the use of the asset are expected to be $505,000. The fair value of the equipment is $404,000.

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

Computation of Recoverable Value

Recoverable Value = Higher of Fair value and Value in use

Recoverable Value = Higher of 404000 and 505000

Recoverable Value = 505000

Computation of Carrying Amount

Carrying Amount = Cost of the Asset - Accumulated Depreciation

Carrying Amount = 909000 - 383800

Carrying Amount = 525200

Carrying Amount is more than Recoverable amount. Therefore the asset is said to be Impaired.

Accounts Titles and Explanation

Debit

Credit

Loss on impairment

121200

Accumulated Depreciation (525200 - 404000)

121200

Being recognition of Impairment Loss

Computation of Recoverable Value

Recoverable Value = Higher of Fair value and Value in use

Recoverable Value = Higher of 404000 and 505000

Recoverable Value = 505000

Computation of Carrying Amount

Carrying Amount = Cost of the Asset - Accumulated Depreciation

Carrying Amount = 909000 - 383800

Carrying Amount = 525200

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