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Homework answers / question archive / Whispering Company uses special strapping equipment in its packaging business
Whispering Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $11,100,000 and had an estimated useful life of 8 years with no salvage value, At December 31, 2020, new technology was introduced that would accelerate the obsolescence of Whispering's equipment. Whispering's controller estimates that expected future net cash flows on the equipment will be $6,993,000 and that the fair value of the equipment is 56,216,000. Whispering intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Whispering uses straight-line depreciation.
Prepare all required journal entries (if any) at December 31, 2021. The fair value of the equipment at December 31, 2021, is estimated to be $6,549,000. (If no entry is required, select "No entry" for the account titles and enter for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit Dec 31
Journal Entries in the Books of Whispering Company at the Year ending December 31, 2021
| Date | Particulars | Debit | Credit |
| Dec 31,2021 | Depreciation Expense A/c Dr | $1,554,000 | |
|
To Accumulated Depreciation A/c (being depreciation for the remaing usefull life is provided) |
$1,554,000 |
Workings:-
Carrying Value As on 31/12/2021:-
| Orginal Cost of the equipment on 1/1/19 | $11,100,000 | |
| Less: Depreciation for 2019 | $11,100,000/8 | (1,387,500) |
| Less: Depreciation for 2020 | $11,100,000/8 | (1,387,500) |
| Carrying Value As on 31/12/2020 | 8,325,000 | |
| Fair Value of the equipment | 6,216,000 |
Since the Fair value is less than the Carrying value, Impairment loss of 2,109,000 is recognised in the year end dec 31, 2020 and the carrying Amount of the Equipment is reduced to 6,216,000.
On Dec 31, 2021,
The Carrying Amount of the Equipment = $6,216,000
The Fair value of the Equipment = $6,549,000
Since Carrying Amount is more than the Fair value of the Equipment No impairment loss is recognized and the Depreciation is calculated on the carrying Amount for the remaining Usefull life ie 4 Years.
Depreciation = 6,216,000/ 4 years = $1,554,000
