On January 1, 2014, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $450,000 and will incur cash outflows of $341,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstad’s discount rate is 10%. Required:1.Prepare schedules to determine whether, at the end of 2019, the equipment is impaired and, if so, the impairment loss to be recognized.2.Prepare the journal entry to record the impairment.3.Next Level How would your answer to Requirement 1 change if the discount rate was 14% and the cash flows were expected to continue for 6 years?4.Next Level How would your answer change if management planned to implement efficiencies that would save $14,000 each year?5.Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $630,000 and estimates that it would cost $15,000 to sell the equipment. How much would the company recognize as the impairment loss?

Name: On January 1, 2014, Borstad Company purchased equipment for $1,150,000
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Description: On January 1, 2014, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, because of technological changes in the industry and reduce

The question is related Impairment of Assets. The Impairment loss is calculated as under Impairment loss = Recoverable amount- Carrying amount. Recoverable amount is higher of two a. Net Selling Price b. Value in use. Calculation of Impatiment loss as on December 31st, 2019 Impairment Loss = Recovearble amount - Carrying amount = $581515 - $874000 Impairment Loss = $ 292485 Calculation of Carrying Amount as on December 31st, 2019 Cost of Asset oas on Jan. 1st, 2014 = $1150000 Less:- Depreciation for 6 years = $(276000) (1150000 ÷ 25 × 6) Carrying amount as on Dec. 31st, 2019 = $874000 Recoverable amount is higher of two a. Net Selling Price i.e. Not Given b. Value in use. Present Value of Net Cash Inflow ($450000 - $341000) PVIFA @ 10% (T1 - T8) $109000 × 5.335 = $581515 Journal entry to record the impairment. Account Title Debit ($) Credit ($) Impairment Loss A/c Dr. 292485 To Equipment A/c 292485 Income Statement A/c Dr. 292485 To Impairment Loss A/c 292485if the discount rate was 14% and the cash flows were expected to continue for 6 years Impairment Loss = Recovearble amount - Carrying amount = $423901 - $874000 Impairment Loss = $ 450099 Calculation of Carrying Amount as on December 31st, 2019 Cost of Asset oas on Jan. 1st, 2014 = $1150000 Less:- Depreciation for 6 years = $(276000) (1150000 ÷ 25 × 6) Carrying amount as on Dec. 31st, 2019 = $874000 Recoverable amount is higher of two a. Net Selling Price i.e. Not Given b. Value in use. Present Value of Net Cash Inflow ($450000 - $341000) PVIFA @ 14% (T1 - T6) $109000 × 3.889 = $423901 Note:- As per our policy and guidelines we can answer only three parts in one go for rest parts to answer kindly resend again specifying the parts to be answered. Thank you.

Answered: On January 1, 2014, Borstad Company…

FINANCIAL ACCOUNTING

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ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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On January 1, 2014, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $450,000 and will incur cash outflows of $341,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstad’s discount rate is 10%.

	Required:
1.	Prepare schedules to determine whether, at the end of 2019, the equipment is impaired and, if so, the impairment loss to be recognized.
2.	Prepare the journal entry to record the impairment.
3.	Next Level How would your answer to Requirement 1 change if the discount rate was 14% and the cash flows were expected to continue for 6 years?
4.	Next Level How would your answer change if management planned to implement efficiencies that would save $14,000 each year?
5.	Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $630,000 and estimates that it would cost $15,000 to sell the equipment. How much would the company recognize as the impairment loss?

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