Short Track Speed Skating, a public company, purchased equipment on January 10, 2017, for $600,000. At that time, management estimated that the equipment would have a useful life of 10 years and a residual value of $25,000. Short Track uses the straight-line method of depreciation and has a December 31 year end.

Short Track tested the equipment for impairment on December 31, 2021, after recording the annual depreciation expense. It was determined that the equipment’s recoverable amount was $260,000, and that the total estimated useful life would be seven years instead of 10, with a residual value of $10,000 instead of $25,000.

Instructions

a. Calculate the annual depreciation expense for the years 2017 to 2021 and the carrying amount at December 31, 2021.

b. Record the impairment loss, if any, on December 31, 2021.

c. What will appear on Short Track’s 2021 income statement and balance sheet with regard to this equipment?

d. Assuming no further impairments or recoveries, calculate the annual depreciation expense for the years 2022 and 2023.

Why is it important to recognize impairment losses?