NW Tool Supply Company purchased land and a building on May 1, 2012, for $385,000. The company paid $115,000 in cash and signed a 5% note payable for the balance. At that time, it was estimated that the land was worth $150,000 and the building, $235,000. The building was estimated to have a 25-year useful life with a $35,000 residual value. The company has a December 31 year end and uses the single diminishing-balance depreciation method for buildings. The following are related transactions and adjustments during the next three years.

2012

Dec. 31 Recorded annual depreciation.

31 Paid the interest owing on the note payable.

2013

Feb. 17 Paid $225 to have the furnace cleaned and serviced.

Dec. 31 Recorded annual depreciation.

31 Paid the interest owing on the note payable.

31 The land and building were tested for impairment. The land had a recoverable amount of $120,000 and the building, $240,000.

2014

Jan. 31 Sold the land and building for $320,000 cash: $110,000 for the land and $210,000 for the building.

Feb. 1 Paid the note payable and interest owing.

Instructions

(a) Record the above transactions and adjustments, including the purchase on May 1, 2012.

(b) What factors may have been responsible for the impairment?

(c) Assume instead that the company sold the land and building on October 31, 2014, for $400,000 cash: $160,000 for the land and $240,000 for the building. Record the journal entries to record the sale.

TAKING IT FURTHER

How might management determine the recoverable amount of the land and building at each year end? Would the company need to test the assets for impairment every year?