Question

Splish Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $12,500,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Splish’s equipment. Splish’s controller estimates that expected future net cash flows on the equipment will be $7,875,000 and that the fair value of the equipment is $7,000,000. Splish intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Splish uses straight-line depreciation.

Prepare the journal entry (if any) to record the impairment at December 31, 2017. (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.)

Date
Account Titles and Explanation
Debit
Credit
Dec. 31

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Prepare the journal entry for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $7,375,000. (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.)

Date
Account Titles and Explanation
Debit
Credit
Dec. 31

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Prepare the journal entry (if any) to record the impairment at December 31, 2017 and for the equipment at December 31, 2018, assuming that Splish intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018. (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.)

Date
Account Titles and Explanation
Debit
Credit
12/31/17
12/31/18

Answer 1

	Date	Accounts title	Dr	Cr
a	December 31, 2017	loss on impairment [$9375000 - $7,000,000]	2375000
		To Accumulated Depreciation		2375000
		Note:- if carrying value of assets is greater than the future cash inflow, then consider the fair value Carrying value = $12,500,000 - [12,500,000 / 8 years * 2 years] =$12,500,000 - 3125000    = $9375000
b	December 31, 2018	Depreciation expense [$7,000,000 / 4 years]	1750000
		To Accumulated Depreciation		1750000
c	December 31, 2017	loss on impairment	2375000
		To Accumulated Depreciation		2375000
	December 31, 2018	Accumulated Depreciation	375000
		To Recovery of impairment loss [$7,375,000 - $7,000,000 ]		375000