Question

2. Barry’s Bakery has an oven with a $40,000 net book value. The oven’s estimated future cash flows are $50,000, and the fair value is $25,000.

                      a. Is there impairment on the oven? If so, record the journal entry for this impairment.

b. How would your answer to part a change if the estimated future cash flows were $30,000 and fair value was $15,000?

Answer 1

a) i) Net Book Value (Carring Amount) = $ 40000

ii) Fair Value = $ 25000

iii) Value In Use = Present Value of future cash flows = PV of $ 50000

Here Discounted factor is not given.

Value In Use is Nil

iv) Recoverable Amount = higher of ii) and iii) i.e. $ 25000

Therefore Impairment Loss = Carring Value - Recoverable Amount = $ 40000 - $ 25000 = $ 15000

Journal

Impairment Loss A/c .......Dr $ 15000

To Oven A/c $15000

Profit and Loss A/c .....Dr $ 15000

To Impairment Loss A/c $ 15000

b) Also here discounted factor is not given therefore Value in Use is Nil and Fair VAlue is $ 15000

Therefore Recoverable Amount Is Higher of value in use and fair value i.e. $ 15000

Carring Value is same as per the Question

so Impairment loss = $ 40000 - $ 15000 = $ 25000

Impairment Loss A/c .......Dr $ 25000

To Oven A/c $25000

Profit and Loss A/c .....Dr $ 25000

To Impairment Loss A/c $ 25000