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The effect was to recognize future operating losses FASB decided that this violated the definition of a liability
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Measurement
Write asset down to the LOWER of Carrying amount Fair value less cost to sell (see definitions below) Stop depreciating the asset Costs to sell Includes incremental direct costs to transact the sale
Broker commissions Legal & title transfer fees Closing costs
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Yes
Yes
No
No
Yes
Are quotes prices in active markets available as basis for fair value determination?
No
Yes
No
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The asset shall continue to be classified as held and used until it is disposed of
Depreciation ends and a gain or loss is recorded when the property is disposed of
Abandoned
The date it ceases to be used
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Impairment Example 1
Johnson Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Johnson's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment. The management of Johnson Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $80,000 per year. The fair value of the equipment is $240,000. No goodwill was associated with the purchase of the equipment. (a) Determine if an impairment loss should be recognized.
What is the book value of the asset? (We need to first figure out how much is in accumulated depreciation.)
(b)
Determine the amount of the loss and prepare the journal entry to record the loss. Debit Credit
(c)
What journal entry should Johnson Company make if future cash flows related to the equipment were $980,000 in total? Debit
Credit
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Impairment Example/Homework 2 Howard Company purchased a manufacturing facility 8 years ago on January 8, 1994 for $10,000,000. The facility has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Howards operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the facility should be evaluated for possible impairment at December 31, 2001. The management of Howard Company estimates that the facility has a remaining useful life of 7 years. Net cash inflow from the facility will be $800,000 per year. The fair value of the facility (using present value techniques) is estimated to be $3,400,000. No goodwill was associated with the purchase of the equipment. (a) Determine if an impairment loss should be recognized.
(b)
If appropriate, determine the amount of the loss and prepare the journal entry to record the loss.
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