Question
Question 2 Rohan Company purchased equipment in January 2008 for $8,000,000 that had an estimated useful life of 6 years with a salvage value of
Question 2
Rohan Company purchased equipment in January 2008 for $8,000,000 that had an estimated useful life of 6 years with a salvage value of $2,000,000. At December 31, 2010, new technology was introduced that would accelerate the obsolescence of Rohans equipment. Rohans controller estimates that expected future net cash flows on the equipment will be $4,900,000 and that the fair value of the equipment is $4,600,000. Rohan intends to continue using the equipment, but it is estimated that the remaining life is 2 years and new salvage value is $1,000,000. Rohan uses straight-line depreciation.
Required:
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2010.
(b) Prepare any journal entries for the depreciation of the equipment at December 31, 2011.
(c) Assume that Rohan used the double-declining balance method of depreciation, prepare the journal entry (if any) to record the impairment at December 31, 2010.
(d) Assume that Rohan used the double-declining balance method of depreciation, prepare the journal entries for the depreciation of the equipment at December 31, 2011.
Additional Notes
Please note the following for the Construction of the Building in Question 1
1. Capitalization Period
Begins when all 3 of these are in effect:
Expenditures for the asset have been made.
Activities for readying the asset are in progress (i.e. construction begins)
Interest costs are being incurred.
Ends when: The asset is substantially complete and ready for use.
2. The Amount to Capitalize
Capitalize the lesser of:
Actual interest costs
Avoidable interest i.e. the amount of interest that could have been avoided if expenditures for the asset had not been made.
Selecting Appropriate Interest Rate when determining the Avoidable Interest:
For the portion of weighted-average accumulated expenditures* that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.
For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.
* Weighted-average accumulated expenditures - A company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure, which begins when construction starts, and ends when the construction is complete. Note - Any expenditure made prior to the beginning of construction should only be factored in from the time construction began. For example, if a piece of property (upon which construction will take place) was purchased in August of 2015, but construction began in April of 2016, then the cost of the property should be included in the weighted-average accumulated expenditures calculations whose starting period is April 2016. In addition, if construction spans multiple years, then the weighted-average accumulated expenditures as of the end of a year must be carried forward and used as the first expenditure at the beginning of the following year.
Please also note the following re: Weighted-average accumulated expenditures:
If a payment of 12,000 was made on March 1, it means that it was only in existence for 10 months of the year (assuming that the construction was completed at year-end). Likewise, a payment of 8,000 made on July 1 was only in existence for 6 months of the year.(assuming that the construction was completed at year-end).
Therefore the Weighted-average accumulated expenditure for these 2 would be computes as follows:
12,000 x 10/12 = 10,000
8,000 x 6/12 = 4,000
Total = 14,000
Note - the above assumes that the loan was repaid at year-end. However, if the construction was completed at September 30, then the calculations would be as follows:
12,000 x 7/12 = 7,000
8,000 x 3/12 = 2,000
Total = 9,000
Interest to be Capitalized
a. We would then multiply this amount by the interest rate on specific debt borrowed to finance the project.
b. If the amount borrowed, say 8,000, is less that this amount of 14,000 (or 9,000) , then we would also multiply the difference (i.e. 6,000 or 1,000) by the average interest rate on other general debt.
The avoidable interest would then be the sum of a. and b. above. Next, the interest to be capitalized would then be the lesser of the avoidable interest and the actual interest incurred.
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