Exercise 6: Impairment of PP&E

Freeport Company owns equipment purchased in 2017 at a cost of $600,000 with an expected salvage value of $50,000 and 5-year useful life. Freeport uses the straight-line method of depreciation for this asset.

Part A: Compute the book value of the equipment at the end of 2018.

Year	Calculation	Depreciation Expense	Accumulated Depreciation	Book Value (Cost Acc. Depr.)

On December 31, 2018, after using the equipment for two years, Freeport suspects that the equipment may be impaired and has gathered the following information:

• Expected future cash flows from use and disposition (undiscounted) of the equipment are $400,000

• Estimated fair value of the equipment is $360,000

• Freeport plans to continue using the equipment

Part B: Is the equipment impaired? If so, by what amount?

Part C: Prepare any necessary journal entry to record any impairment.