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11.5 Describe Some Special Issues in Accounting for Long-Term Assets

Special Issues​

Several special situations require attention in accounting for long-term assets:

  1. Impairment
  2. Disposal of Assets
  3. Exchanges of Assets
  4. Repairs and Improvements

Impairment​

Impairment occurs when an asset's carrying value exceeds its recoverable amount.

When to Test:

  • Significant decline in value
  • Change in use
  • Market conditions change
  • Annual test for goodwill

Impairment Loss: Impairment Loss = Carrying Value - Recoverable Amount

Journal Entry:

650000 Impairment Loss             €[amount]
[Asset Account] or [Accumulated Depreciation]    €[amount]
To record asset impairment

Luxembourg: Must follow impairment rules and test when indicators exist.

Disposal of Assets​

When Asset is Sold or Discarded:

Steps:

  1. Record depreciation up to date of disposal
  2. Remove asset and accumulated depreciation
  3. Record any gain or loss
  4. Record cash received (if sold)

Example: Sale of Equipment

  • Original Cost: €10,000
  • Accumulated Depreciation: €7,000
  • Book Value: €3,000
  • Sale Price: €4,000
  • Gain: €1,000

Journal Entry:

510000 Cash                        €4,000
241000 Accumulated Depreciation     €7,000
223000 Equipment                                €10,000
720000 Gain on Sale of Equipment                 €1,000
To record sale of equipment

If Sale Price was €2,000 (Loss):

510000 Cash                        €2,000
241000 Accumulated Depreciation     €7,000
650000 Loss on Sale of Equipment     €1,000
223000 Equipment                                €10,000
To record sale of equipment at loss

Exchanges of Assets​

Asset Exchanges:

  • Trade-in old asset for new asset
  • May involve cash payment
  • Must determine gain or loss

Luxembourg: Must follow exchange rules and account for properly.

Repairs and Improvements​

Ordinary Repairs:

  • Maintain asset in working condition
  • Expensed immediately
  • Don't extend useful life

Improvements (Betterments):

  • Enhance asset or extend useful life
  • Capitalized
  • Added to asset cost

Example:

  • Routine maintenance: €500 (Expense)
  • Major renovation extending life: €10,000 (Capitalize)

Luxembourg Compliance Note​

Special issues in Luxembourg:

  • Must follow impairment rules
  • Must account for disposals properly
  • Must distinguish repairs from improvements
  • Must comply with tax rules
  • Must maintain proper documentation

Think It Through​

What is the difference between an ordinary repair and an improvement? How should each be accounted for?