The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $ 2,058,300 with depreciation to date of $ 914,800 as of December 31, 2014. On December 31, 2014, management projected its future net cash flows from this equipment to be $ 686,100 and its fair value to be $ 526,010. The company intends to use this equipment in the future. Prepare the journal entry (if any) to record the impairment at December 31, 2014. At December 31, 2015, the equipment

Debit Fixed Asset account $ 457,400

Credit Impairment account (p/l) $ 457,400

Being entries to recognize impairment of asset.

Explanation:

According to IAS 36 impairment of assets, an asset is impaired when the carry amount is lower that 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 present value of the future cash inflows expected from the use of the asset.

Cost of asset = $2,058,300

Depreciation to date = $ 914,800

Carrying amount = $2,058,300 - $ 914,800

= $ 1,143,500

Fair value = $526,010

Expected future net cash flows from the equipment = $686,100

The recoverable amount equals expected future net cash flows from the equipment since this is higher than fair value. This is $686,100.

Since this is lower than the carrying amount, the asset is impaired said to be impaired and will be written down to it's recoverable amount.

Hence

Amount to be written down = $ 1,143,500 - $ 686,100

= $ 457,400

To make the adjustment,

Debit Fixed Asset account $ 457,400

Credit Impairment account (p/l) $ 457,400

Being entries to recognize impairment of asset.