Yernar uses special plastic wrapping equipment in its shipping business. The equipment was purchased in January 2021 for €4,000,000 and had an estimated useful life of 8 years with no salvage value. On December 31, 2022, new technology was introduced that would accelerate the obsolescence of Yernar’s equipment. Yernar’s controller estimates that the value-in-use of the equipment will be €2,800,000 and that the fair value less costs to sell of the equipment is €2,400,000. Yernar intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Yernar uses straight-line depreciation. Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2022. (b) Prepare any journal entries for the equipment on December 31, 2023. The fair value of the equipment on December 31, 2023, is estimated to be €2,900,000.
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.
Yernar uses special plastic wrapping equipment in its shipping business. The equipment was purchased in January 2021 for €4,000,000 and had an estimated useful life of 8 years with no salvage value. On December 31, 2022, new technology was introduced that would accelerate the obsolescence of Yernar’s equipment. Yernar’s controller estimates that the value-in-use of the equipment will be €2,800,000 and that the fair value less costs to sell of the equipment is €2,400,000. Yernar intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Yernar uses straight-line
Instructions
(a) Prepare the
(b) Prepare any journal entries for the equipment on December 31, 2023. The fair value of the equipment on December 31, 2023, is estimated to be €2,900,000.
(c) Repeat the requirement for (b), assuming that Yernar intends to dispose of the equipment and that it has not been disposed of as of December 31, 2023. NRV and the value-in-use is €2,400,000 at December 31, 2022, and €2,900,000 at December 31, 2023.
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