Derrick’s Domino Manufacturing Company learned that one of its cutting machines is obsolete. Although the company will continue to use this machinery in the future, management believes that an impairment write- down is required. The following information relates to the cutting machine:
Description Cutting Machine
Cost …………………………………………………………………….. $3,200,000 Accumulated depreciation (up to the date of the impairment test)……. $ 1,280,000
Total estimated future cash flows………………………………………. $1,225,000
Total discounted future cash flows $ 1,060,000 Estimated fair value….. $ 1,050,000
Costs to sell …………………………………………………………….. $ 4,000
Remaining useful life from the impairment date……………………….. 6 years
The firm estimates that the machine has a useful life of 10 years and it has used it for four years. It has no salvage value.
Required
a. Prepare the journal entry required to record the impairment loss.
b. Assuming that Derrick’s uses the straight- line method with no residual value, prepare the journal entry to record the revised depreciation expense for the first year immediately following the impairment.
c. Assume that two years following the impairment write- down, the fair value of the asset falls to $ 725,000. The sum of the undiscounted future cash flows is $ 745,000. What is the carrying value of the asset at this time? Prepare any journal entry necessary to reflect the change in fair value.