Question

Mickey Mouse Corp, a company that makes all your dreams come true, purchased machinery on January 1, 2016 at a price of $100,000. The company also paid $3,400 of freight-in to have the machine delivered to its manufacturing center, $5,500 of insurance while the machine was in transit, and $4,000 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 $80,000 and the fair value was $40,000. The journal entry to record the impairment loss includes a debit to XXX for XXX and a credit to XX for XX . If no entry is necessary, enter "No Entry" for all fields.

Answer 1

Cost of the asset = Purchase price + Freight in + Insurance + Installation charges

= $100,000 + $3,400 + $5,500 + $4,000

= $112,900

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

= ($112,900 - $0) / 10

= $11,290

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

= $112,900 - ($11,290*2)

= $90,320

An asset is impaired if the carrying value is greater than the undiscounted future cash flows.

Impairment loss = Carrying value - Fair value

As the carrying value ($90,320) is greater than the undiscounted future cash flows ($80,000), the asset is impaired.

Impairment loss = $90,320 - $40,000

= $50,320

Impairment loss	$50,320
Accumulated depreciation		$50,320