Question

The abrasives group of Chemical Products Inc. (CPI) has been suffering a decline in its business, due to new product introductions by competitors. At 31 December 20X5, the assets of the abrasives cash-generating unit are shown as follows (in millions) on the company’s SFP:

	Cost	Accumulated Depreciation	Net Book Value
Equipment (10-year life)	$2,350	$1,250	$1,100
Fixtures (10-year life)	1,210	240	970
Patent rights (40-year life)	800	310	490
	$4,360	$1,800	$2,560

An impairment test indicates that the recoverable amount of the abrasives cash-generating unit’s assets is $1,660 million. The assets are not separable—they must be operated or sold together as a group. No individual asset has a determinable individual fair value less cost to sell.

Required:
1. Prepare an adjusting journal entry to record the impairment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions.)



2. What would be the net book value of the assets after one year if no impairment was recorded? Assume that straight-line depreciation is used. (Enter your answer in millions.)

Answer 1

1. Impairment loss = Carrying amount - recoverable amount = $2560 - $1660 = $900

Patent = 490 x 900 / 2560 = $172
Equipment = 1100 x 900 / 2560 = $387
Fixtures = 970 x 900 / 2560 = $341

Account Titles and Explanation	Debit	Credit
Impairment Loss	$900
Accumulated Amortization - Patents rights		$172
Accumulated Depreciation - Equipment		$387
Accumulated Depreciation - Fixtures		$341
(To record Impairment)

2. Net book value of the assets after one year:

Equipment = $1,100 - 2350/10 = $865
Fixtures = $970 -   1,210 /10 = $849
  Patent rights = $490 - 800/40 = $470