Presented below is information related to Equipment owned by Bobcat Manufacturing, Inc. at December 31, 2019.

Cost $7,000,000

Accumulated depreciation to date 800,000

Expected future net cash flows 5,000,000

Fair value 3,400,000

Assume that Bobcat Inc., will continue to use this asset in the future and that depreciation expense has been recorded for 2019. As of December 31, 2019, the equipment has a remaining useful life of 4 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 2019.

(c) The fair value of the equipment at December 31, 2019, is $5, 100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Answer and Explanation:

The journal entries are shown below:

a. Loss on Impairment Dr $ 3200,000

To Accumulated Deprecation - equipment $3,200,000

(Being the impairment loss is recorded)

For recording this we debited the impairment loss as it increased the loss and credited the accumulated depreciation as it reduced the asset value

The computation is shown below:

Cost $7,000,000

Less: Accumulated depreciation to date - $800,000

Carrying amount $6,200,000

Less: Fair value - $3,400,000

Loss on impairment $2,800,000

b. Depreciation expense Dr $850,000

To Accumulated depreciation - equipment $850,000

(Being the depreciation expense is recorded)

For recording this we debited the depreciation expense as it increased the expense and credited the accumulated depreciation as it reduced the asset value

The computation is shown below:

= $3,400,000 : 4 years

= $850,000

c. No journal entry is required for increase in fair value