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 $390,000 and will incur cash outflows of $281,000 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 14%. 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 18% 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 $11,000 each year? 5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $554,000 and estimates that it would cost $13,000 to sell the equipment. How much would the company recognize as the impairment loss?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 $390,000 and will incur cash outflows of $281,000 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 14%.

	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 18% 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 $11,000 each year?
5.	Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $554,000 and estimates that it would cost $13,000 to sell the equipment. How much would the company recognize as the impairment loss?

Expert Solution

Step 1

Impairment:

Impairment is a situation when assets fair value as a comparison to assets carrying value (book value) is less. Then it estimates by the firm the value of assets is continuously decreasing than its carrying value, which results loss that will bear by the firm.

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