On January 1, 2003, the Vallahara Company purchased machinery for $650,000 which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of $50,000. Late in 2007, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of five years, over which it estimates the asset will produce total cash inflows of $1,000,000 and will incur total cash outflows of $825,000. The cash flows are independent of the company’s other activities and will occur evenly each year. The company is not able to determine the fair value based on a current selling price of the machinery. The company’s discount rate is 10%.
1. Prepare schedules to determine whether, at the end of 2007, the machinery is impaired and, if so, the impairment loss to be recognized.
2. If the machinery is impaired, prepare the journal entry to record the impairment.