Presented below is information related to equipment owned by Davis Company at December 31, 2020. Cost $6,750,000 Accumulated depreciation to date 750,000 Expected future net cash flows 5,250,000 Fair value 3,600,000 Assume that Davis intends to dispose of the equipment in the coming year. As of December 31, 2020, the equipment has a remaining useful life of 4 years. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2020. Prepare the journal entry (if any) to record depreciation expense for 2021. The asset was not sold by December 31, 2021. The fair value of the equipment on that date is $3,975,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Presented below is information related to equipment owned by Davis Company at December 31, 2020.
Cost $6,750,000
Expected future net
Fair value 3,600,000
Assume that Davis intends to dispose of the equipment in the coming year. As of December 31, 2020, the equipment has a remaining useful life of 4 years.
- Prepare the
journal entry (if any) to record the impairment of the asset at December 31, 2020. - Prepare the journal entry (if any) to record depreciation expense for 2021.
- The asset was not sold by December 31, 2021. The fair value of the equipment on that date is $3,975,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
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