SE Parts Supply Company purchased land and a building on August 1, 2012, for $595,000. It paid $200,000 in cash and signed a 5% note payable for the balance. The company estimated the land was worth $340,000 and the building, $255,000. The building was estimated to have a 40-year useful life with a $15,000 residual value. The company has a December 31 year end and uses the straight-line 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
May 21 Paid $2,000 to fi x the roof.
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 $280,000 and the building, $249,000.
2014
Mar. 31 Sold the land and building for $480,000 cash: $250,000 for the land and $230,000 for the building.
Apr. 1 Paid the note payable and interest owing.
Instructions
(a) Record the above transactions and adjustments, including the acquisition on August 1, 2012.
(b) What factors may have been responsible for the impairment?
(c) Assume instead that the company sold the land and building on November 30, 2014, for $650,000 cash: $390,000 for the land and $260,000 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? Does the company need to test the assets for impairment every year?