INTERMEDIATE ACCOUNTING 2 -- CHAPTER 11

3. Mueller Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and a $100,000 residual value. Muellers operations have experienced significant losses for the past two years and as a result, the company has decided that the equipment should be evaluated for possible impairment. The management of Mueller Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflows from the equipment are estimated to be $80,000 per year. The fair value of the equipment is $240,000.

Required (show all work for credit):

(a) Determine if an impairment loss should be recognized.

(b) If an impairment loss has occurred, prepare the journal entry to record the loss.

(c) How would your answers change if the net cash inflows from the equipment were estimated to be $100,000 per year for the remaining seven years?

(d) Going back to the original information, how would your answers to parts (a) and (b) change if the fair value of the equipment was $500,000?