question archive The information that follows relates to equipment owned by Coronado Limited at December 31, 2020: Cost
The information that follows relates to equipment owned by Coronado Limited at December 31, 2020: Cost
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The information that follows relates to equipment owned by Coronado Limited at December 31, 2020:
Cost. $9,450,000
Accumulated depreciation to date 1,050,000
Expected future net cash flows (undiscounted). 7,350,000
Expected future net cash flows (discounted, value in use) 6,667,500
Fair value 6,510,000
Costs to sell (costs of disposal) 52,500
At December 31, 2020, Coronado discontinues use of the equipment and intends to dispose of it in the coming year by selling it to a competitor. It is expected that the costs of disposal will total $52,500.
a)
Assume that Coronado is a private company that follows ASPE. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. if no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
1. Prepare thejournal entry at December 31, 2020, to record asset impairment, if any.
2. Prepare thejournal entry to record depreciation expense for 2021.
3. Assume that the asset was not sold by December 31, 2021. The equipment's fair value (and recoverable amount) on this date is $6.83 million. Prepare the journal entry, if any, to record the increase in fair value. It is expected that the costs of disposal will total $52,500. No. Account Titles and Explanation Debit Credit (1) Accumulated Impairment Losses - Equipment | 1732500 Equipment | 1732500 (2) Depreciation Expense | 666750 Accumulated Depreciation - Equipment 666750 (3) Equipment 776750 Revaluation Surplus (OCI) 776750
b.
Repeat the requirements in (a) above assuming that Coronado is a public company that follows IFRS, and that the asset meets all criteria for classi?cation as an asset held for sale. {Credit account titles are automatically indented when the amount is entered. Do not indent manually. if no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit (1) Loss on Impairment l I 1942500 Equipment 1942500 (2) No Entry I I 0 No Entry 0 (3) Equipment l I 320000 Revaluation Surplus (OCI) 320000
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Answer:
a.
(1)
Dr. Loss on Impairment 1,890,000
Cr. Accumulated Impairment Losses - equipment 1,890,000
(2)
No entry.
(3)
Dr. Accumulated Impairment Losses - equipment 320,000
Cr. Recovery loss on impairment 320,000
b.
(1)
Dr. Loss on Impairment 1,942,500
Cr. Accumulated depreciation - equipment 1,942,500
(2)
No entry.
(3)
Dr. Accumulated depreciation - equipment 320,000
Cr. Gain on impairment reversal 320,000
Step-by-step explanation
a. ASPE
To determine whether the asset is impaired, we have to compare the carrying amount vs. the recoverable amount.
Carrying amount:
Cost $9,450,000
Accumulated depreciation 1,050,000
Book value $8,400,000
Recoverable amount: Expected future net cash flows (undiscounted) - $7,350,000
Impairment test:
Carrying amount = $8,400,000
Recoverable amount = $7,350,000
Since carrying amount is higher than the recoverable amount, it means that the asset is impaired.
To compute for impairment loss:
Carrying amount $8,400,000
Fair value 6,510,000
Impairment loss $1,890,000
Journal entries:
(1) To record the impairment loss for December 31, 2020:
Dr. Loss on Impairment 1,890,000
Cr. Accumulated Impairment Losses - equipment 1,890,000
(2)To record the depreciation expense for December 31, 2020:
No entry. Since the equipment is already held for sale, it should no longer be depreciated.
(3) Assume asset was not sold in December 1, 2021, increase in fair value:
Dr. Accumulated Impairment Losses - equipment 320,000
Cr. Recovery loss on impairment 320,000
Revised FV $6,830,000
Old FV 6,510,000
Recovered impairment loss $320,000
Limit for recovered impairment loss - should not exceed the impairment loss previously recorded
b. IFRS
To determine whether the asset is impaired, we have to compare the carrying amount vs. the recoverable amount.
Carrying amount:
Cost $9,450,000
Accumulated depreciation 1,050,000
Book value $8,400,000
Recoverable amount: higher between the Fair value less cost to sell and the value in use
Fair value less cost to sell = $6,510,000 - 52,500 = $6,457,500
Value in use = PV of future cash flows = $6,667,500
Recoverable amount = value in use
Impairment test:
Carrying amount = $8,400,000
Recoverable amount = $6,667,500
Since carrying amount is higher than the recoverable amount, it means that the asset is impaired.
To compute for impairment loss:
Carrying amount $8,400,000
FV less cost to sell 6,457,500
Impairment loss $1,942,500
Journal entries:
(1) To record the impairment loss for December 31, 2020:
Dr. Loss on Impairment 1,942,500
Cr. Accumulated depreciation - equipment 1,942,500
(2)To record the depreciation expense for December 31, 2020:
No entry. Since the equipment is already held for sale, it should no longer be depreciated.
(3) Assume asset was not sold in December 1, 2021, increase in fair value:
Dr. Accumulated depreciation - equipment 320,000
Cr. Gain on impairment reversal 320,000
Revised FV less cost to sell $6,777,500 ($6,830,000 - 52,500)
Old FV less cost to sell 6,457,500
Recovered impairment loss $320,000
Limit for recovered impairment loss - should not exceed the impairment loss previously recorded
