Question

Mickey Mouse Corp, a company that makes all your dreams come true, purchased machinery on January 1, 2016 at a price of $100822. The company also paid $3052 of freight-in to have the machine delivered to its manufacturing center, $5451 of insurance while the machine was in transit, and $3223 to have the machine installed. On January 1, 2016, Mickey Mouse estimated that the machine would last for 10 years, have a salvage value of $0 at the end of 10 years, and the company elected to use straight line depreciation. On December 31, 2017, after the company recorded the 2017 depreciation expense entry, the company believed the asset may be impaired, so it performed an impairment test. The company determined that the expected future net cash flows were $80000 and the fair value was $45821. What is the amount of impairment loss recorded by Mickey Mouse Corp during 2017?

Answer 1

Machinery = Cost + Freight in + Insurance + Installation

= $100,822 + $3,052 + $5,451 + $3,223

= $112,548

Depreciation under Straight-line method = (Cost - Salvage value) / Estimated useful life

= ($112,548 - $0) / 10

= $11,255

Accumulated depreciation on December 31, 2017 = $11,255 * 2 = $22,510

Carrying value on December 31, 2017 = Cost - Accumulated depreciation

= $112,548 - $22,510

= $90,038

The asset is impaired if the carrying value is greater than the expected future net cash flows

As the Carrying value ($90,038) is greater than the expected future net cash flows ($80,000), the machinery is impaired.

Impairment loss = Carrying value - Fair value

= $90,038 - $45,821

= $44,217