Module 9 Tutorial Exercise Solutions Diamond Autobody (DA) has a fiscal year end of 12/31. It started construction of a new equipment on May 1 of Year 0. The expenditures made for the construction are the following: 45,000 on 5/1 40,000 on 12/1 The construction completed on 12/31 of Year 0. DA has only one interest bearing debt, which is a long-term loan of $100,000 with an annual interest rate of 15%. DA started using the equipment at the beginning of Year 1. DA estimates a 4-year useful life. Residual value at the end of an estimated four-year service life is expected to be $10,000. At the end of the Year 1, Diamond Autobody spent $40,000 in cash to upgrade the equipment. The cash spent in the upgrade is capitalized to the original cost account of the equipment. After the upgrade, the equipment can be used for another 10 years (total useful life became 11 years as opposed to the original 4 years) and the salvage value remained at $10,000. Assume that Diamond Autobody uses the straight-line depreciation method. At the end of Year 3, Diamond Autobody estimated a significant decline in the future cash flows generated by the equipment. The estimated undiscounted future cash flows are $80,000. After some research, Diamond Autobody determined that the equipment could be sold at a price of $75,000 in an arm's length transaction. In the beginning of Year 4, Diamond exchanged the equipment for a similar one. The estimated fair value of the equipment acquired was $70,000. Because of the similarity in the two equipments, Diamond Autobody cannot justify that the exchange has commercial substance. Required 1. Calculate the total amount of cost capitalized in the equipment account at the end of Year 0 (i.e. construction expenditures plus interest capitalized) 2. Calculate the depreciation expense for the Year 2. 3. Determine the amount of impairment loss (if any) at the end of the Year 3. 4. Prepare the journal entry for the exchange in the beginning of the Year 4