Free Solved Bonita Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $10,900,000 and had an estimated useful life of 8 years with no salvage value.


Screenshot 2024 01 10 213835

Screenshot 2024 01 10 213835

Screenshot 2024 01 10 214553

Step 1 of 2

According to question, Bonita uses special strapping equipment in its packaging business and the equipment was purchased in January 2019 for $10,900,000 and had an estimated useful life of 8 years with no salvage value. new technology was introduced that would accelerate the obsolescence of Bonita’s equipment, on December 31, 2020. The estimated expected future net cash flows on the equipment will be $6,867,000and that the fair value of the equipment is $6,104,000.

Journal entry is to be prepared to record the impairment and for the equipment, the estimated fair value of the equipment is to be $6,431,000 . And also prepare the journal entry (if any) to record the impairment on December 31, 2020, and for the equipment on December 31, 2021, assuming that Bonita intends to dispose of the equipment.

Explanation:

Bonita who involves in a packaging business, uses the special strapping business and by the given information, journal entry is to be prepare for recording the impairment and for the equipment.

 

Step 2 of 2

1) The journal entry to record the impairment on December 31, 2020 is prepared as –

To calculate the impairment loss, it is needed to compare the carrying amount of the equipment with its fair value.

Original Cost:$10,900,000

Accumulated Depreciation (as of December 31, 2020)=(10,900,0008)×2

Accumulated Depreciation (as of December 31, 2020)=$2,725,000

The carrying amount is the original cost minus accumulated depreciation. Carrying Amount=$10,900,000−$2,725,000=$8,175,000

Impairment Loss=Carrying Amount−Fair Value

Impairment Loss=$8,175,000−$6,104,000

Impairment Loss=$2,071,000

Date Account Dr Cr
2020-12-31 Impairment Loss A/c $2,071,000
To Accumulated Depreciation A/c $2,071,000
( Being loss of impairment recorded)

2) The journal entry for the equipment on December 31, 2021 is to be prepared as –

There is no loss recorded recorded in the duration but the depreciation for 2021 is calculated as the remaining carrying amount ($8,175,000 – $2,071,000) divided by the remaining useful life (4 years).

Depreciation =  $8,175,000 – $2,071,0004

Depreciation = $6,431,0004

Depreciation =$1,607,750

Date Account Dr Cr
2021-12-31 Depreciation Expense A/c $1,607,750
To accumulated depreciation A/c $1,607,750
(Being depreciation expenses is recorded)

3)Assuming that Bonita intends to dispose of the equipment and that it has not been disposed of as of December 31, 2021, the journal entry (if any) to record the impairment on December 31, 2020, and for the equipment on December 31, 2021 is to be prepared as –

it is assume that the equipment is considered impaired on December 31, 2020, and it is intended to be disposed of on December 31, 2021.

Journal entry to record the impairment loss on December 31, 2020 is to be prepared as –

Date Account Dr Cr
2020-12-31 Impairment Loss A/c $2,071,000
To accumulated depreciation A/c $2,725,000
(Being loss on impairment is been recorded on 31 December 2020)

 

Date Account Dr Cr
2021-12-31 Accumulated Depreciation A/c $2,725,000
To Loss on Disposal Equipment A/c $2,725,000
(Being loss on occured disposal recorded)

The Loss on Disposal is calculated as the difference between the carrying amount and the fair value at the time of disposal.

Loss on Disposal =Carrying Amount−Fair Value

Loss on Disposal =$8,175,000−$6,104,000

Loss on Disposal = $2,071,000.

Explanation:

Journal entry to record the impairment is done by crediting the Impairment Loss in the books of accumulated Depreciation A/c and depreciation for 2021 is calculated as the remaining carrying amount ($6,431,000.) divided by the remaining useful life 4 year.

Final solution

Journal entries to record the impairment, for the equipment on December 31, 2021 and to record the impairment on December 31, 2020, and for the equipment on December 31, 2021 assuming that Bonita intends to dispose of the equipment and that it has not been disposed of as of December 31, 2021, has been recorded.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Call Now Button