Why is this answer correct or incorrect? To determine the impairment loss, let's follow the steps for testing and calculating the impairment loss of the equipment. ### **Step 1: Calculate the book value of the equipment as of December 31, 2024** The equipment was purchased for $250,000 with a **5-year useful life** and a **$50,000 salvage value**. The depreciation method used is **straight-line depreciation**. The formula for straight-line depreciation is: \[ \text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}} \] \[ \text{Annual Depreciation} = \frac{250,000 - 50,000}{5} = 40,000 \] Now, let's calculate the book value at the end of Year 2 (December 31, 2024): \[ \text{Total Depreciation for 2 Years} = 40,000 \times 2 = 80,000 \] \[ \text{Book Value at December 31, 2024} = 250,000 - 80,000 = 170,000 \] So, the book value of the equipment at December 31, 2024, is **$170,000**. ### **Step 2: Determine if an impairment exists** To test for impairment, we compare the **book value** of the equipment with its **recoverable amount** (the higher of its market value or the **future cash flows** expected from its use). - **Market Value**: $100,000 (as given in the problem). - **Future Cash Flows**: $160,000 (as estimated by Saxby). The recoverable amount is the higher of these two values: \[ \text{Recoverable Amount} = \max(100,000, 160,000) = 160,000 \] ### **Step 3: Calculate the impairment loss** The impairment loss is the differ