A company acquired a new piece of equipment on January 1, 2009 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2011, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years. At what amount should the equipment be reported on the December 31, 2011 balance sheet under U.S. GAAP?

Question

Quizplus · Accepted Answer

Under U.S. GAAP, the equipment should be reported at its cost less accumulated depreciation. The annual straight-line depreciation expense for the equipment is calculated as follows:

($200,000 - $20,000) / 10 years = $18,000 per year

Therefore, the accumulated depreciation at December 31, 2011 would be:

2 years x $18,000 per year = $36,000

The carrying value of the equipment at December 31, 2011 would be:

Cost of equipment - accumulated depreciation = $200,000 - $36,000 = $164,000

However, the equipment was appraised on January 1, 2011 and determined to have a fair value of $190,000, which is less than its cost. Therefore, the equipment should be written down to its fair value less the remaining estimated residual value as of the appraisal date. The loss on impairment would be recognized on the income statement.

The impairment loss is calculated as follows:

Carrying amount of equipment - fair value less estimated disposal costs = $200,000 - ($190,000 - $25,000) = $35,000

However, under U.S. GAAP, the impairment loss is limited to the amount by which the carrying amount exceeds the asset's fair value (i.e. $164,000 - $190,000 = $26,000). Therefore, the impairment loss would be $26,000 and the carrying value of the equipment would be:

Fair value less estimated disposal costs - impairment loss = ($190,000 - $25,000) - $26,000 = $139,000

Since one year has elapsed since the impairment, the equipment would be further depreciated by $18,000 for the year ending December 31, 2011. Therefore, the carrying value of the equipment at December 31, 2011 would be:

$139,000 - $18,000 = $121,000

However, since the equipment is depreciated on a straight-line basis, the annual depreciation expense would have been calculated based on the revised cost of $139,000, which would result in an annual depreciation expense of $11,400 ($139,000 - $25,000 residual value / 10 years). Therefore, the accumulated depreciation at December 31, 2011 would be:

2 years x $11,400 per year = $22,800

The carrying value of the equipment at December 31, 2011 would be:

Cost of equipment - accumulated depreciation = $139,000 - $22,800 = $116,200

However, since the equipment was impaired, the carrying value cannot be increased above the recoverable amount. Therefore, the carrying value of the equipment at December 31, 2011 would be:

Fair value less estimated disposal costs - impairment loss = ($190,000 - $25,000) - $26,000 = $139,000

Therefore, the correct answer is C) $146,000.

A Company Acquired a New Piece of Equipment on January