(ImpairmentCost Recovery and Rational Entity Models)

The information that follows relates to equipment owned by Gaurav Limited at December 31, 2017:

Cost

$10,000,000

Accumulated depreciation to date

2,000,000

Expected future net cash flows (undiscounted)

7,000,000

Expected future net cash flows (discounted, value in use)

6,350,000

Fair value

6,200,000

Costs to sell (costs of disposal)

50,000

Assume that Gaurav will continue to use this asset in the future. As at December 31, 2017, the equipment has a remaining useful life of four years. Gaurav uses the straight-line method of depreciation.

Instructions

(a)Assume that Gaurav is a private company that follows ASPE.

• 1.Prepare the journal entry at December 31, 2017, to record asset impairment, if any.
• 2.Prepare the journal entry to record depreciation expense for 2018.
• 3.The equipment's fair value at December 31, 2018, is $6.5 million. Prepare the journal entry, if any, to record the increase in fair value.

(b)Repeat the requirements in (a) above assuming that Gaurav is a public company that follows IFRS.

(c)Referring to the qualitative characteristics identified in the conceptual framework for financial reporting (discussed in Chapter2), discuss the differences between the cost recovery impairment model and the rational entity impairment model. Which method is preferred?