Fixed asset impairment journal entry
Overview
Sometimes, there is a sudden drop of the fair value of the fixed asset which leads to the impairment that the company cannot ignore. Likewise, if that happens, the company needs to make the fixed asset impairment journal entry in order to record the loss as a result of impairment in the income statement.
There are various reasons that could lead to a sudden drop of the fair value of the fixed asset, including the negative changes in technology, obsolescence, physical damage, or a significant decline of market value, etc. Likewise, the impairment loss that comes from the sudden drop of the fair value of the fixed asset should be recognized and recorded in the income statement in the period that it occurs.
Fixed asset impairment journal entry
The company can make the fixed asset impairment journal entry by debiting the impairment losses account and crediting the accumulated impairment losses account.
| Account | Debit | Credit |
|---|---|---|
| Impairment losses | 000 | |
| Accumulated impairment losses | 000 |
In this journal entry, total expenses on the income statement increase while total assets on the balance sheet decrease. This is due to the impairment losses account is an expense account in which its normal balance is on the debit side.
On the other hand, the accumulated impairment losses account is a contra account to the fixed asset on the balance sheet. Likewise, its normal balance is on the credit side.
Fixed asset impairment example
For example, due to one of its machines has become obsolete, the company ABC needs to recognize a loss of $50,000 as a result of impairment as of December 31, in order to comply with the accounting standards.
In this case, the company ABC needs to make the fixed asset impairment journal entry for the impairment loss of $50,000 due to obsolescence of its machine as below:
| Account | Debit | Credit |
|---|---|---|
| Impairment losses | 50,000 | |
| Accumulated impairment losses | 50,000 |
In this journal entry, total expenses on the income statement increase by $50,000 while total assets on the balance sheet decrease by $50,000.