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Presented below is information related to equipment owned by Porto Company on December 31, 2017. Cost $5,600,000 Accumulated depreciation to date 640,000 Expected future net cash flows 4,000,000 Fair value 2,720,000 Assume that Porto will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years. Fill the missing amounts and choose the correct option. For Porto company, the recoverability test compares $ 4960000 to $ 4000000. As a result, the asset the recoverability test, because is/are less than so a on impairment is recorded in 2017. Prepare the journal entry to record depreciation expense for 2018.

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Answer:

Depreciation $ 1,000,000 (debit)

Accumulated Depreciation $ 1,000,000 (credit)

Explanation:

Step 1 Analyse whether there was an impairment

Impairment of an asset happens when its Carrying Amount is greater than its Recoverable Amount.

Carrying Amount

Carrying Amount = Cost - Accumulated depreciation

                             = $5,600,000 - $640,000

                             = $ 4,960,000

Recoverable Amount

Is the higher of :

  1. Value in use : $4,000,000 and
  2. Fair Value less Cost to sell $2,720,000

Therefore Recoverable Amount is $4,000,000

Impairment

Carrying Amount  > Recoverable Amount, therefore the Equipment Was impaired

The impairement loss is $ 960,000

Step 2 Calculate the depreciation 2018.

Depreciation Charge = Cost / Useful life

                                   = ($5,600,000 - $640,000 -  $ 960,000) / 4

                                   = $ 1,000,000

Journal

Depreciation $ 1,000,000 (debit)

Accumulated Depreciation $ 1,000,000 (credit)

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