Question
On January 1, Year 1, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a
On January 1, Year 1, Borstad Company purchased equipment for $1,150,000. It is depreciating the equipment over 25 years using the straight-line method and a zero residual value. Late in Year 6, 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 $450,000 and will incur cash outflows of $342,000 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 Year 6, 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?
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