Impairment of assets

Give explanations and solutions

On January 1, 20X1, SME J acquired an oil delivery truck and measured it under the cost model. Management estimated the useful life of the truck at nine years with zero residual value. SME J determined that straight-line depreciation is appropriate. At December 31, 20X1, the truck has a carrying amount of P24,000 (original cost of P27,000 minus accumulated depreciation of P3,000).

In 20X2, because of a sharp downturn in demand for fuel oil, SME J dramatically decreased its use of this truck. Consequently, at December 31, 20X2, in addition to the indicators of impairment, management also considers other variables and re-estimates the truck's remaining useful life at five years, during which the truck is expected to provide the following net cash flows:

20X3 = P6,000

20X4 = P5,500

20X5 = P5,000

20X6 = P3,500

20X7 = P1,500

The appropriate rate to discount these future cash flows to their risk-adjusted present value is 10% a year.

At December 31, 20X2, the market price for the truck is P15,400. If the truck were sold,

license and title fees of P400 would be paid.

(Parts A through C: For ease of calculation, assume that all cash flows occur on the last day of each year, and ignore income tax.)

PART A

Required

1. Determine the amount of impairment loss, if any, for SME J's truck at December 31, 20X2.
2. Prepare the entry, if required, to record the impairment.

PART B

By December 31, 20X4, the market for fuel oil has recovered and demand improves for services provided by oil delivery trucks. Management also has considered other variables and estimates that the truck's remaining useful life is four years, through which the truck is expected to provide the following net cash flows:

20X5 = P5,500

20X6 = P4,000

20X7 = P2,500

20X8 = P1,000.

The appropriate rate for discounting these future cash flows to their risk-adjusted present value is 8% a year.

At December 31, 20X4 the market price for SME J's truck is P11,300. If the truck was sold, license and title fees of P300 would be paid.

Required

1. Prepare the journal entries, if any required in 20X4. Show supporting computations.

PART C

Assume the facts are the same as in Part B. However, in Part C the market price of the truck is P13,500.

Required

1. Prepare the journal entries, if any required in 20X4. Show supporting computations.