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Problem 4 On January 1, 2018, K&J Company purchased equipment for $1,180,000. The asset is being depreciated using the straight line method (25 year
Problem 4 On January 1, 2018, K&J Company purchased equipment for $1,180,000. The asset is being depreciated using the straight line method (25 year useful life, zero salvage value). In late 2023, K&J Company is concerned that the asset may be impaired, due to technological advances in the industry. Additionally, K&J believes the remaining useful life of the asset is 8 years. The company estimates that the equipment will produce cash inflows of $400,000 and will incur cash outflows of $295,000 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. K&J's discount rate is 12% (assume net cash flows are received at the end of the year). Part A. Determine whether the equipment is impaired at the end of 2023, and if so, the amount of the impairment loss. Part B. Based on your work in Part A, prepare the journal entry to record the impairment loss, if any. Part C. How does your answer to Part A change if the company's discount rate is 16% and the estimated remaining useful life is 6 years? Part D. Ignore the information in Part C. How would your answer to Part A change if management expected to implement cost savings initiatives that would save $10,000 per year?
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