On January 1, 2014, Borstad Company purchased equipment for $1,200,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in 2019, because of technological changes in the industry and reduced selling prices for its products, Borstad believes that its equipment may be impaired and will have a remaining useful life of 8 years. Borstad estimates that the equipment will produce cash inflows of $420,000 and will incur cash outflows of $307,000 each year for the next 8 years. It is not able to determine the fair value of the equipment based on a current selling price. Borstads discount rate is 14%.

	Required:
1.	Prepare schedules to determine whether, at the end of 2019, the equipment is impaired and, if so, the impairment loss to be recognized.
2.	Prepare the journal entry to record the impairment.
3.	Next Level How would your answer to Requirement 1 change if the discount rate was 18% and the cash flows were expected to continue for 6 years?
4.	Next Level How would your answer change if management planned to implement efficiencies that would save $11,000 each year?
5.	Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $573,000 and estimates that it would cost $13,000 to sell the equipment. How much would the company recognize as the impairment loss?

Chart of Accounts

CHART OF ACCOUNTS

Borstad Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
185	Equipment
198	Accumulated Depreciation: Equipment

	LIABILITIES
211	Accounts Payable
221	Notes Payable
224	Interest Payable
231	Salaries Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
523	Salaries Expense
531	Bad debt Expense
532	Depreciation Expense
540	Interest Expense
891	Loss on Impairment

Schedules

1. Prepare schedules to determine whether, on December 31, 2019, the equipment is impaired and, if so, the impairment loss to be recognized. Enter the Accumulated Depreciation amount as a negative number.

Complete the Recoverability Test and determine the results of the test.

Additional Instructions

Borstad Company

Recoverability Test

December 31, 2019

1	Book Value:
2	Equipment (cost)
3	Less: Accumulated Depreciation
4	Undiscounted expected net cash flows:
5	Undiscounted expected net cash flows

The book value is greater than the undiscounted expected net cash flows so Borstadshould recognize an impairment loss at December 31, 2019.

Complete the Impairment Analysis to determine the amount of the loss (if any) under US GAAP at December 31, 2019.

Additional Instructions

Borstad Company

Impairment Analysis (US GAAP)

December 31, 2019

1	Fair Value:
2	Present Value of the Expected Net Cash Flows
3	Equipment (book value)
4	Impairment Loss (if any)

General Journal

2. Prepare the journal entry on December 31, 2019 to record the impairment.

General Journal Instructions

PAGE 12

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Next Level

3. How would your answer to Requirement 1 change if the discount rate was 18% and the cash flows were expected to continue for 6 years?

Additional Instruction

Borstad Company would recognize a loss of if the discount rate was 18% and the cash flows were expected to continue for 6 years.

4. How would your answer change if management planned to implement efficiencies that would save $11,000 each year?

Step 1: Complete the Recoverability Test below.

Additional Instructions

Borstad Company

Recoverability Test

December 31, 2019

1	Book Value:
2	Equipment
3	Less: Accumulated Depreciation
4	Book Value
5	Undiscounted expected net cash flows:
6	Undiscounted expected net cash flows

Step 2: Complete the following statement regarding the Recoverability Test results.

The book value is more than the undiscounted net cash flows so Borstad should recognize an impairment loss at December 31, 2019.

IFRS

5. Refer to Requirement 1 and assume that the company uses IFRS. It determines that the fair value of the equipment is $573,000 and estimates that it would cost $13,000 to sell the equipment. How much would the company recognize as the impairment loss?

Additional Instructions

Borstad Company

Impairment Analysis (IFRS)

December 31, 2019

1	Fair Value of Equipment
2	Costs to sell
3	Book Value of Equipment
4	Impairment Loss (if any)

Present Value of 1