NEW ERA UNIVERSITY

REVALUATION AND IMPAIRMENT

1.Robertson Inc. bought a machine on January 1, 2002 for 400,000. The machine had an
expected life of 20 years and was expected to have a salvage value of 40,000. On July 1,
2012, the company reviewed the potential of the machine and determined that its
undiscounted future net cash flows totaled 200,000 and its discounted future net cash flows
totaled 140,000. If no active market exists for the machine and the company does not plan to
dispose of it, what should Robertson record as an impairment loss on July 1, 2012?
a. 0
b. 11,000
c. 20,000
d. 71,000

2.Holcomb Corpsssoration owns machinery with a book value of 285,000. It is estimated that the
machinery will generate future cash flows of 300,000. The machinery has a fair value of
210,000. Holcomb should recognize a loss on impairment of

a. -0-.
b. 15,000.
c. 75,000.
d. 90,000.
3.Kohlman Corporation owns machinery with a book value of 380,000. It is estimated that the
machinery will generate future cash flows of 350,000. The machinery has a fair value of
280,000. Kohlman should recognize a loss on impairment of

a. -0-.
b. 30,000.
c. 100,000.
d. 70,000.

4.Newell, Inc. purchased equipment in 2011 at a cost of 800,000. Two years later it became
apparent to Newell, Inc. that this equipment had suffered an impairment of value. In early
2013, the book value of the asset is 480,000 and it is estimated that the fair value is now only
320,000. The entry to record the impairment is

a. No entry is necessary as a write-off violates the historical cost principle.

b. Retained Earnings............................................................ 160,000
Accumulated Depreciation—Equipment............. 160,000
c. Loss on Impairment of Equipment.................................. 160,000
Accumulated Depreciation—Equipment............. 160,000
d. Retained Earnings............................................................ 160,000
Reserve for Loss on Impairment of Equipment... 160,000

For questions 5-7

Presented below is information related to equipment owned by Finley Company at December
31, 2012.
Cost 7,000,000
Accumlated depreciation to date ,800,000
Expected future net cash flows 5,000,000
Fair value 3,400,000

Assume that Finley will continue to use this asset in the future. As of December 31, 2012, the
equipment has a remaining useful life of 4 years.

Instructions

5. Prepare the journal entry (if any) to record the impairment of the asset at December 31,
2012.
 6. Prepare the journal entry to record depreciation expense for 2013.
7. The fair value of the equipment at December 31, 2013 is 4,100,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.

For questions 8-10

Dexter Company uses special strapping equipment in its packaging business. The equipment
was purchased in January 2011 for 8,000,000 and had an estimated useful life of 8 years with
no salvage value. At December 31, 2012, new technology was introduced that would
accelerate the obsolescence of Dexter’s equipment. Dexter’s controller estimates that
expected future net cash flows on the equipment will be 5,000,000 and that the fair value of
the equipment is 4,400,000. Dexter intends to continue using the equipment, but it is
estimated that the remaining useful life is 4 years. Dexter uses straight-line depreciation.

Instructions

8. Prepare the journal entry (if any) to record the impairment at December 31, 2012.
9. Prepare any journal entries for the equipment at December 31, 2013. The fair value of the
equipment at December 31, 2013, is estimated to be 4,600,000.
10. Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the
equipment and that it has not been disposed of as of December 31, 2013.