LT WK 4 Graded upload - E11-18 (Impairment) The management...

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should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2007. On December 31, 2007, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future. (L0 5) Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2007. (b) Where should the gain or loss (if any) on the write-down be reported in the income statement? (c) At December 31, 2008, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value. (d) What accounting issues did management face in accounting for this impairment? (a) If the expected future net cash flows from the use of the asset If the expected future net cash flows from the use of the asset Equipment cost $900,000 less: accumulated depreciation 400,000 Carrying amount of equipment 500,000 Expected future net cash flow 300,000 Carrying amount of equipment 500,000 Total -200,000 Carrying amount of equipment 500,000 Fair value 230,000 Loss on impairment 270,000 Since the expected future net cash flow is less than the carrying amount, then an impairment has occurred. Petro Garcia, Inc. records the impairment loss as follows: Loss on Impairment 270,000 Accumulated depreciation 270,000 ok (b) Petro Garcia should report the impairment loss "as part of income from continuing ok operations, in the 'Other expenses and losses' section," as stated on p. 536 of Ch. 11. (c) The carrying amount of the equipment should not change in 2008 except for depreciation. (c) No entry necessary. Restoration of any impairment loss is not permitted. Petro Garcia, Inc. "may not restore an impairment loss for an asset held for use. The rationale for not writing the asset up in value is that the new cost basis puts the impaired asset on an equal basis with other assets that are unimpaired" (ch. 11, p. 536). ok (d) "The general accounting standard of lower-of-cost-or-market for inventories does not (d) apply to property, plant, and equipment. Even when property, plant, and equipment has suffered partial obsolescence, accountants have been reluctant to reduce the asset’s carrying amount. Why? Because, unlike inventories, it is difficult to arrive at a fair value for property, plant, and equipment that is not subjective and arbitrary" (ch. 11, p. 534). Even though the fair value of the asset increased. The company could not restore the impairment loss, the asset is being held for future use. The company has recorded a loss on impairment, so the reduced carrying amount becomes the new cost basis. 1.5 points, part C is not correct
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This note was uploaded on 01/14/2012 for the course ACCOUNTING ACC 422 taught by Professor Unknown during the Spring '11 term at University of Phoenix.

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LT WK 4 Graded upload - E11-18 (Impairment) The management...

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