The management of Sprague Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2019. On December 31, 2019, management projected the present value of future net cash flows from this equipment to be $300,000 and its fair value less cost of disposal to be $280,000. The company intends to use this equipment in the future. The remaining useful life of the equipment is 4 years.
Instructions
a. Prepare the journal entry (if any) to record the impairment at December 31, 2019.
b. Where should the gain or loss (if any) on the write-down be reported in the income statement?
c. At December 31, 2020, the equipment's recoverable amount is $270,000. Prepare the journal entry (if any).
d. What accounting issues did management face in accounting for this impairment?