The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2014. On December 31, 2014, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future.

Instructions

(a) Prepare the journal entry (if any) to record the impairment at December 31, 2014.

(b) Where should the gain or loss (if any) on the write-down be reported in the income statement?

(c) At December 31, 2015, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.

(d) What accounting issues did management face in accounting for this impairment?