Hammond Company has a December 31 year end and uses straight-line depreciation for all property, plant, and equipment. On July 1, 2010, the company purchased equipment for $500,000. The equipment had an expected useful life of 10 years and no residual value. On December 31, 2013, after recording annual depreciation, Hammond reviewed its equipment for possible impairment. Hammond determined that the equipment has a recoverable amount of $225,000. It is not known if the recoverable amount will increase or decrease in the future.

Instructions

(a) Prepare journal entries to record the purchase of the asset on July 1, 2010, and to record depreciation expense on December 31, 2010, and December 31, 2013.

(b) Determine if there is an impairment loss at December 31, 2013, and if there is, prepare a journal entry to record it.

(c) Calculate depreciation expense for 2014 and the carrying amount of the equipment at December 31, 2014.

(d) Assume that the equipment is assessed again for impairment at December 31, 2014, and that the company determines the recoverable amount is $240,000. Should Hammond make an adjustment to reflect the increase in the recoverable amount? Why or why not?