Vaughn Company owns equipment that cost $1,035,000 and has accumulated depreciation of $437,000. The expected future net cash flows from the use of the asset are expected to be $575,000. The fair value of the equipment is $460,000. Prepare the journal entry, if any, to record the impairment loss.

Entries required to record impairment loss

Debit Impairment loss (p/l)   $23,000

Credit Equipment account    $23,000

Explanation:

According to IAS 36, an asset is said to be impaired when the carrying amount is more than the recoverable amount. The recoverable amount is the higher of the value in use or the fair value less cost to sell.

The value in use is the expected future net cash flows from the use of the asset.

Given that the expected future net cash flows from the use of the asset are expected to be $575,000 while the fair value of the equipment is $460,000.

As such, recoverable amount is $575,000 being higher than the fair value.

The carrying amount

= $1,035,000 -  $437,000

= $598,000

The carrying amount is higher than the recoverable amount, hence the asset is impaired.

Impairment amount

= $598,000  - $575,000

= $23,000

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