SE Parts Supply Company purchased an industrial robot on July 1, 2015, for $395,000. It paid $100,000 in cash and signed a 5% note payable for the balance. The industrial robot was estimated to have a 20-year useful life with a $15,000 residual value. The company has a December 31 year end and prepares adjusting entries annually. It uses the double diminishing-balance method of depreciation to the nearest month for equipment. The following are related transactions and adjustments during the next three years.
2015
Dec. 31 Recorded annual depreciation.
31 Paid the interest owing on the note payable.
2016
May 21 Paid 52,000 to update robot's software system. The updates are required annually.
Dec. 31 Recorded annual depreciation.
31 Paid the interest owing on the note payable.
31 The equipment was tested for impairment It had a recoverable amount of $275,000.
2017 Mar. 31 Sold the industrial robot for 5240,000 cash.
Apr. 1 Paid the note payable and interest owing.
Instructions
(a) Record the above transactions and adjustments, including the acquisition on July 1, 2015.
(b) What factors may have been responsible for the impairment?
(c) Assume instead that the company sold the robot on September 30, 2017, for $260,000 cash. Prepare the journal entries to record the sale.
Taking It Further
How might management determine the recoverable amount of the robot at each year end? Does the company need to test the asset for impairment every year?