Presented below is the information related to equipment owned by the Charlton Company December 31, 2019. Cost $16,000,000
Accum Depreciation to date 8,000,000
Expected future net cash flows 7,000,000
Fair Value 6,000,000
Assume that Charlton will continue to use this asset in the future. As of December 31, 2019, the equipment has a remaining useful life of 5 years.
Instructions:
A. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2019.
B. Prepare the journal entry to record depreciation expense for 2020.
C. Prepare the journal entry (if any) necessary to record this increase in fair value.

Please see answer in explanation column

Explanation:

1.To record the impairment loss  of the asset at December 31, 2019.

Date         Account Title and explanation         Debit                   Credit

Dec 31, 2019  Loss on Impairment               $ 2,000,000  

      To Accumulated Deprecation  - equipment              $2,000,000

Calculation

Cost                                                                $16,000,000

Less: Accumulated depreciation to date    -$8,000,000

Carrying amount                                             $8,000,000

Less: Fair value                                              -$6,000,000

Loss on impairment                                        $2,000,000

Here, The impairment loss is being debited since it  increased the loss the accumulated depreciation  was credited for reducing the value of asset.

2

To record  the depreciation expense

Date         Account Title and explanation         Debit                   Credit

Dec 31, 2020 Depreciation expense              $1,200,000

To Accumulated depreciation - equipment                                $1,200,000

Calculation:

Fair value =6,000,000

= $6,000,000 ÷ 5 years

= $1,200,000

c. No journal entry for increase in fair value

A. Dr Impairment loss (p/l) $1,000,000

Cr Accum Depreciation $1,000,000

Being entries to record the impairment of the asset

B. Dr Depreciation (p/l) $1,400,000

Cr Accum Depreciation $1,400,000

Being entries to record the depreciation expense of the asset

C. If the fair price remains $6,000,000, the recoverable amount will still be $7,000,000 hence no entries are required.

Explanation:

An asset is said to be impaired when the carrying amount is higher than the recoverable amount. The recoverable amount is the higher of the fair value and the value in use which is the present value of the future cash flow from the asset.

The carrying amount or book value

= Cost less accumulated depreciation

= $16,000,000 - $8,000,000

= $8,000,000

Other information given

Expected future net cash flows 7,000,000

Fair Value 6,000,000

The recoverable amount

= $7,000,000 (being higher than the fair value)

The recoverable amount is lower than the carrying amount as such the asset is impaired.

Impairment = $8,000,000 - $7,000,000

= $1,000,000

To record the impairment

Dr Impairment loss (p/l) $1,000,000

Cr Accum Depreciation $1,000,000

Being entries to record the impairment of the asset

Depreciation is the allocation of the cost of asset to p/l

Depreciation = carrying amount/useful life

= $7,000,000/5

=$1,400,000

Dr Depreciation (p/l) $1,400,000

Cr Accum Depreciation $1,400,000

Being entries to record the depreciation expense of the asset

If the fair price remains $6,000,000, the recoverable amount will still be $7,000,000 hence no entries are required.

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