Question

Martinez Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $7,800,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2020, new technology was introduced that would accelerate the obsolescence of Martinez’s equipment. Martinez’s controller estimates that expected future net cash flows on the equipment will be $4,875,000 and that the fair value of the equipment is $4,290,000. Martinez intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Martinez uses straight-line depreciation. What is the carrying value of the equipment at December 31, 2020?

Carrying value $?

Prepare the journal entry (if any) to record the impairment at December 31, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Prepare any journal entries for the equipment at December 31, 2021. The fair value of the equipment at December 31, 2021, is estimated to be $4,485,000. (Credit account titles are automatically indented when the amount is entered.

Prepare the journal entry (if any) to record the impairment at December 31, 2020. assuming that Martinez intends to dispose of the equipment and that it has not been disposed of as of December 31, 2021.

Answer 1

a. Carrying value of asset: $7,800,000 – $1,950,000* = $5,850,000.

*($7,800,000 / 8) X 2

b. Journal entry to record the impairment at December 31, 2020

Loss on Impairment 1,560,000

Accumulated Depreciation 1,560,000

(Loss of impairment math $5,850,000 – $4,290,000)

c. Journal entries for the equipment at December 31, 2021

Depreciation Expense 1,121,250

Accumulated Depreciation 1,121,250

(Depreciation = $4,485,000 / 4)

d.  Journal entry to record the impairment at December 31, 2020

Loss on Impairment 1,560,000

Accumulated Depreciation 1,560,000

Accumulated Depreciation 195,000

Recovery of Impairment Loss ($4,485,000– $4,290,000) 195,000

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