Accounting – 7.1 Accounting principles | e-Consult
7.1 Accounting principles (1 questions)
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The company should account for the equipment by recognising an impairment loss. Under the prudence concept, the company should not continue to show the equipment on the balance sheet at its original cost of £20,000. Instead, it should reduce the carrying value of the equipment to its recoverable amount, which is £3,000.
Accounting Treatment:
- Calculate the Impairment Loss: The impairment loss is calculated as the difference between the original cost and the recoverable amount: £20,000 - £3,000 = £17,000.
- Journal Entry: The following journal entry should be made:
Debit: Impairment Loss Account £17,000 Credit: Accumulated Depreciation £17,000 - Balance Sheet Impact: The carrying value of the equipment on the balance sheet will be reduced to £3,000. The accumulated depreciation account will also be increased by £17,000.
- Profit and Loss Account Impact: The impairment loss of £17,000 will be recognised as an expense in the profit and loss account, reducing the company's profit for the period.