Question

Waterway Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $ 11,400,000 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 ofWaterway’s equipment. Waterway’s controller estimates that expected future net cash flows on the equipment will be $ 7,182,000 and that the fair value of the equipment is $ 6,384,000. Waterway intends to continue using the equipment, but it is estimated that the remaining useful life is  4 years. Waterway uses straight-line depreciation.

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

b)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 $ 6,726,000.

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

Answer 1

		Debit	credit
(a)	Loss on impairment (8,550,000 - 6,384,000)	$2,166,000
	Accumulated depreciation		2,166,000
	(Being impairment loss recorded)
	Note:- carrying value of assets= 11,400,000 - 28,50,000(11,400,000÷8 ×2) = 8,550,000
(b)	Depreciation expenses	$16,81,500
	Accumulated depreciation		$16,81,500
	( Depreciation = 6,726,000/4= 16,81,500)
(c)	Loss on impairment	$2,166,000
	Accumulated depreciation		$2,166,000
	(Being impairment loss recorded)
	Accumulated depreciation	$342,000
	Recovery of impairment loss(6,726,000 - 6,384,000)		$342,000
	( Being entry recorded for equipment assuming equipment has been disposed of)