Question

Computing and Assessing Plant Asset Impairment

Zeibart Company purchases equipment for $215,000 on July 1, 2012, with an estimated useful life of 10 years and expected salvage value of $21,500. Straight-line depreciation is used. On July 1, 2016, economic factors cause the market value of the equipment to decline to $85,000. On this date, Zeibart examines the equipment for impairment and estimates $115,000 in future cash inflows related to use of this equipment.

a. Is the equipment impaired at July 1, 2016?
AnswerYesNo

b. Compute the impairment loss (if any) as of 7/1/2016 as well as the depreciation expense for the 12 months from July 1, 2016 to July 1, 2017. Round calculations to the nearest dollar.
Using the financial statement effects template, show how those two entries affect Zeibart Company’s balance sheet and income statement.

Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	-	Contra Assets	=	Liabilities	+	Contrib. Capital	+	Earned Capital
b. Impairment charge	$Answer	+	$Answer	-	$Answer	=	$Answer	+	$Answer	+	$Answer
c. Depreciation expense	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer

Income Statement
	Revenue	-	Expenses	=	Net Income
	$Answer	-	$Answer	=	$Answer
	Answer	-	Answer	=	Answer

Answer 1

a. Yes

Since the expected Future cash flow (115,000) is less than the Carrying value of the Assets (137,600) as on 1 July 2016.

Cost of Equipment	215,000
Less: Salvage value	21,500
Depreciable value	193,500
Deprecitaion(193500/10)	19,350

Deprecitaion(2012-13)	19,350
Deprecitaion(2013-14)	19,350
Deprecitaion(2014-15)	19,350
Deprecitaion(2015-16)	19,350
Accumulated Depreciation on 1 July 2016	77,400

Net Book Value on 1 July 2016 (215000-77400)

137,600

b.

Net Book Value on 1 July 2016 (215000-77400)	137,600
Less: Fair Value of Assets	85,000
Impairement Loss	52,600

Revised Book Value of the Assets	85,000
Remaining Useful Life	6 Years
Depreciation ( 85,000/6)	14,167

Please note that for Depreciation Calculation it is assumed that now no Salvage Value at the end of the Useful Life.

If you want to include the Salvage then the calculation will be as follows:

Revised Book Value of the Assets	85,000
Less: Salvage value	21,500
Depreciable value	63,500
Remaining Useful Life	6 Years
Depreciation ( 63500/6)	10,583

Balancesheet
Transaction	Cash Asset	+	Non Cash Asset	-	Contra Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Impairment charge			52,600								(52,600)
Depreciation			14,167								(14,167)

Transaction	Revenue	-	Expenses	=	net income
Impairment charge			52,600	=	(52,600)
Depreciation			14,167	=	(14,167)

Dear Student,

Best effort has been made to give quality and correct answer. But if you find any issues please comment your concern. I will definitely resolve your query.

Also please give your positive rating.