[riech001]

Hi everyone, long time lurker to this forum (which has been helpful in finding answers to most of the questions I don’t understand) and this is my first post hoping that someone can help me understanding how they came up with that answer.

Gei Co. determined that, due to obsolescence, equipment with an original cost of $900,000 and accumulated depreciation at January 1, 1992, of $420,000 had suffered permanent impairment, and as a result should have a carrying value of only $300,000 as of the beginning of the year. In addition, the remaining useful life of the equipment was reduced from 8 years to 3. In its December 31, 1992, balance sheet, what amount should Gei report as accumulated depreciation?

A. $600,000

B. $100,000

C. $520,000

C. $700,000

Explanation

Choice “d” is correct. When a permanent impairment occurs, the book value is reduced and a loss is recorded. The loss is credited to accumulated depreciation. In addition, the current year’s depreciation expense should be added. The new book value is depreciated over the new life.

Accumulated depreciation, 1/1/92 $ 420,000

Loss ($900,000 – 420,000) – 300,000 180,000

Depreciation for 1992 ($300,000 / 3) 100,000

Accumulated depreciation, 12/31/92 $ 700,000

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I understand where the numbers came from but don’t really understand why we have to add the $180,000 to accumulated depreciation. As far as I understand, if we have a permanent loss we would debit the loss and credit the equipment.

Thanks!

AUD - NINJA in Training
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Almost there

B -September 8, 2016
A -?
R -?
F -August 1, 2016

[Mehow]

If you book it to accum. depr. your asset's net value will equal the correct amount of 300k. If you book it to loss your accum depr. and original cost won't equal the asset's net value.

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REG = 07/26/16
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[Skynet]

Permanent Impairment is when a Marriage cannot be reconciled and heading for divorce.

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[PharmBoy]

@Skynet Half of marriages end in divorce. The other half end in death.

[Skynet]

PharmBoy – Hence the “Permanent Impairment” especially the Death part : P

AUD - 90
BEC - 78
FAR - 84
REG - 87

World Domination Plan

Phase I : Pass CPA Exams - Complete
Phase II : Megan Fox - In Progress
Phase III : Megan Fox & Scarlett Johansson Lingerie Pillow Fight
Phase IV : Form the new Charlie's Angels with Megan Fox, Scarlett Johansson, & Gal Gadot
Phase V : TBD

BEC : 78
REG : 87
FAR : 84
AUD : 90

World Domination Plan

Phase I : Pass CPA Exams - Complete
Phase II : Megan Fox - Initiated
Phase III : Bring back 8-Tracks
Phase IV : Megan Fox & Scarlett Johansson Lingerie Pillow Fight
Phase V : TBA

[gracexixi]

I think the answer is wrong. Accu. Depreciation.that is reported on the book should be 100. We debit AD 420 and has already removed all outstanding depreciation. And by credit the Asset, we have already book the asset balance down to its fair value 300.

[TNTTN]

Can somebody give me another explanation as to why we debit the loss to the accumulated depreciation?

AUD - 79
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^______^

[Author]

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