Question: The management of Petro Garcia 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, 2017. On December 31, 2017, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future.
Instructions: (a) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
(c) At December 31, 2018, the equipment's fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.
(d) What accounting issues did management face in accounting for this impairment?