Impairment Loss Journal Entry: A Worked Example

Using the accumulated depreciation approach under U.S. generally accepted accounting principles (GAAP), the impairment loss journal entry for equipment held for use is a debit to Impairment Loss and a credit to Accumulated Depreciation. Record it only after the asset fails the recoverability test, and measure it as carrying amount minus fair value. The reduced carrying amount becomes the new basis for future depreciation.

Getting the first entry right is only half the problem. Students also need to calculate later depreciation and avoid reversing a held-for-use loss when market value recovers. This guide follows U.S. GAAP and the impairment approach in section 10.2 of the Wiley Intermediate Accounting textbook. Every example is hypothetical.

When Should You Record An Impairment Loss?

First update depreciation through the testing date. Then apply the asset impairment test: compare the current carrying amount with undiscounted net cash flows from use and eventual disposal. Measure a loss using fair value only after the recoverability screen fails.

You don’t test equipment every period by default. Under ASC 360, a recoverability test is required when events or changes in circumstances suggest the carrying amount may not be recoverable. Examples include a big drop in the asset’s market price, a major change in how it’s used or in its physical condition, or ongoing operating losses tied to it. Testing happens at the asset group level, meaning the lowest level with largely independent cash flows. In our example, the equipment is its own group.

“Undiscounted” means that expected future net cash flows are added without an adjustment for the time value of money. Compare these cash flows with carrying amount to test recoverability. If the asset fails that test, use fair value to measure the impairment loss. The recoverability test uses the entity’s own assumptions about the asset’s use, while fair value reflects market-participant assumptions.

Do not debit Impairment Loss merely because an appraisal is below book value. Also, do not use the cash-flow shortfall as the loss amount. Recognition asks whether a loss is needed; measurement asks how large it is.

Need a refresher on how fair value differs from the historical cost on the books? See historical cost vs fair value.

Impairment loss journal entry: a complete example

Hypothetical example. Beacon Tools owns equipment with an original cost of $120,000. Accumulated depreciation, already updated through December 31, Year 1, is $42,000. Carrying amount is therefore $78,000. Following a major change in production, expected undiscounted cash flows are $69,000 and fair value is $50,000.

The screen fails because $69,000 is less than $78,000. The loss equals $78,000 − $50,000 = $28,000. Record it on December 31:

Accumulated depreciation is a contra-asset account: its credit balance reduces the related asset’s net reported amount. (New to normal balances? See our guide to debits and credits.) It is not money reserved for replacing the equipment. Here, that balance rises from $42,000 to $70,000, leaving $120,000 − $70,000 = $50,000 net equipment.

This entry uses the accumulated-depreciation presentation taught in the lesson. Some accounting systems use a separate accumulated-impairment account or reduce the asset directly. The account layout may differ, but the required net reduction and loss must agree. Do not record both methods and double the write-down.

Alternative: Reduce The Equipment Account Directly

Some companies treat the reduced amount as a fresh cost basis. They clear out the old accumulated depreciation and write the equipment account down to fair value in one entry. For Beacon, that looks like this:

The equipment account drops from $120,000 to $50,000 and accumulated depreciation goes to zero. The net carrying amount is $50,000 and the loss is $28,000, exactly the same as the first entry. Pick one presentation, never both.

Calculate depreciation after impairment

Assume Beacon will keep using the equipment for four more years. Its revised residual value—the expected amount remaining at the end of use—is $6,000, and straight-line depreciation remains appropriate.

Annual depreciation after impairment = ($50,000 − $6,000) ÷ 4 = $11,000.

At the end of Year 2, carrying amount is $39,000 ($50,000 − $11,000). Start with the reduced carrying amount, subtract the current residual-value estimate, and spread the result over the remaining life. Do not restart the original useful life or continue depreciating the old $78,000 balance.

If impairment occurs during a year, separate the time periods. Record ordinary depreciation up to the impairment date, measure the loss at that date, and calculate subsequent depreciation using the revised basis for the remaining period. On an exam, use whatever timing convention the question gives you, such as full months or a half-year rule.

Mid-Year Impairment Example

Say a company’s equipment cost $60,000, has no residual value, and is depreciated at $6,000 a year. On January 1, accumulated depreciation is $30,000. A drop in demand triggers an impairment test on June 30.

1. Update depreciation to June 30: $6,000 × 6/12 = $3,000. Accumulated depreciation is now $33,000, so the carrying amount is $27,000.
2. Test recoverability: undiscounted cash flows are $20,000, which is less than $27,000, so the test fails.
3. Measure the loss: fair value is $18,000, so the loss is $27,000 minus $18,000 = $9,000.
4. Depreciate the new basis: management now expects three more years of use with no residual value. July to December depreciation is $18,000 ÷ 3 × 6/12 = $3,000.

For the year, the company reports $6,000 of depreciation expense and a $9,000 impairment loss. The carrying amount on December 31 is $15,000 ($60,000 minus $45,000 of accumulated depreciation).

Exam tip: students often skip step 1. If you test using the January 1 balance, you overstate the loss by the missed $3,000 of depreciation.

Want more practice like this? The Intermediate Accounting course covers long-lived assets with step-by-step video lessons, or you can start with the free sample course.

Can an impairment loss be reversed?

For long-lived assets held for use under U.S. GAAP, no. Suppose Beacon’s equipment has a fair value of $56,000 at the end of Year 2. Its carrying amount remains $39,000 after the year’s depreciation; the improvement does not create a $17,000 gain or restore the original basis.

The new basis and prohibition on restoration appear in FASB Statement 144, paragraph 15, now reflected in ASC 360-10-35-20. Further deterioration may require another impairment evaluation. A recovery in value and an additional decline are not treated symmetrically.

Qualifying assets held for sale follow a different subsequent-measurement rule. See when held-for-sale impairment recoveries are permitted; do not apply that exception to equipment still classified as held for use.

How Is This Different Under IFRS?

If you’re studying international standards, IAS 36 Impairment of Assets works differently in three ways.

• One step, not two. There’s no undiscounted cash flow screen. You compare the carrying amount with the recoverable amount right away.
• A different measure. Recoverable amount is the higher of fair value less costs of disposal and value in use. Value in use is the present value of the cash flows the asset is expected to produce. The loss is carrying amount minus recoverable amount.
• Reversals are allowed. If conditions improve, a company can reverse an impairment on equipment, but only up to the carrying amount the asset would have had, after normal depreciation, if no impairment had been recorded. Goodwill impairments are never reversed.

For equipment measured under the cost model, recognize the impairment loss in profit or loss and reduce the asset’s carrying amount through an accumulated impairment account or a direct reduction of the asset account. For equipment measured under the revaluation model, recognize the impairment in other comprehensive income to the extent of the existing revaluation surplus for that asset, with any excess recognized in profit or loss. For U.S. exam questions, use the U.S. GAAP rules above.

Where the loss appears and what notes explain

The impairment entry reduces the asset balance and current pretax income. It does not itself pay cash. For the operating equipment in this example, the loss is included in income from continuing operations. If the income statement shows an operating income subtotal, the impairment loss must be included in it (ASC 360-10-45-4). So don’t move it below operating income just because it’s labeled a loss.

The financial-statement notes describe the impaired asset, the circumstances causing the loss, the loss amount and income-statement caption when needed, and the method used to determine fair value. Applicable segment information is also disclosed. Statement 144, paragraphs 25–26, provides the historical reporting framework. For current requirements, see ASC 360-10-45-4 for presentation and ASC 360-10-50-2 for disclosures. To see how fair value inputs are reported, read our guide to fair value disclosures.

Common journal-entry mistakes

• Crediting Cash. The write-down is a noncash entry.
• Using the wrong side of Accumulated Depreciation. Under the accumulated depreciation approach, credit Accumulated Depreciation for the impairment loss. A debit to eliminate the existing accumulated depreciation balance is appropriate in the alternative direct-reduction entry shown above.
• Using the cash-flow shortfall as the loss. For Beacon, $78,000 minus $69,000 is $9,000, but the real loss is $78,000 minus $50,000 fair value, or $28,000.
• Skipping the depreciation update before the test. Bring depreciation up to the testing date first.
• Leaving out later depreciation. Equipment held for use keeps being depreciated.
• Recording a recovery gain. A higher market value does not reverse a U.S. GAAP held-for-use loss.

A useful check is to reconcile three amounts: carrying amount before impairment, impairment loss, and carrying amount after impairment. For Beacon, $78,000 − $28,000 = $50,000. Then keep Year 2 depreciation separate from the Year 1 loss.

Key Takeaways

• Test equipment held for use only when something suggests its carrying amount may not be recoverable, and update depreciation first.
• The recoverability test compares carrying amount with undiscounted cash flows. If the cash flows are lower, the asset is impaired.
• The loss equals carrying amount minus fair value, not the cash-flow shortfall.
• Under the accumulated depreciation approach, debit Impairment Loss and credit Accumulated Depreciation. No cash changes hands.
• Future depreciation is the reduced amount minus residual value, spread over the remaining life.
• Under U.S. GAAP, a held-for-use impairment loss is never reversed.

Interactive exercise for the impairment loss journal entry

Choose which accounts to debit and credit when recording equipment impairment under the accumulated depreciation approach. Then identify how the credit affects the equipment’s carrying amount.

Practice questions with explained answers

1. Equipment has a $44,000 carrying amount, $38,000 undiscounted cash flows, and $30,000 fair value. What entry is needed?

Answer: Debit Impairment Loss $14,000 and credit Accumulated Depreciation $14,000. Recoverability fails; $44,000 − $30,000 measures the loss.

2. After that impairment, residual value is $3,000 and three years remain. What is annual straight-line depreciation?

Answer: $9,000: ($30,000 − $3,000) ÷ 3. The old carrying amount no longer controls future depreciation.

3. After one year, fair value rises to $34,000. What is the carrying amount?

Answer: $21,000, assuming no other changes: $30,000 − $9,000 depreciation. Record no recovery gain for the asset held for use.

Frequently asked questions

Is the impairment loss an expense of future years?

Answer: No. Recognize the loss when required. Future periods separately recognize depreciation based on the reduced amount.

Can Accumulated Depreciation Exceed The Asset’s Cost?

Answer: No. The impairment credit only brings the carrying amount down to fair value, and fair value can’t be less than zero. So accumulated depreciation can at most equal cost. For Beacon, it reaches $70,000 against a $120,000 cost.

Can the same equipment have another impairment later?

Answer: Yes. Later adverse events may require another test. The no-reversal rule does not prevent additional losses.

Is An Impairment Loss A Debit Or A Credit?

Answer: A debit. Impairment Loss is an expense-type account that reduces income. The matching credit goes to Accumulated Depreciation, or directly to the asset account if the company uses that presentation.

Is An Impairment Loss Deductible For Tax Purposes?

Answer: Usually not right away. For U.S. federal income tax, a drop in value alone isn’t a deductible loss. The loss generally has to be fixed by a closed and completed transaction, such as a sale or abandonment. A book impairment generally does not reduce the asset’s tax basis. Tax depreciation continues under the applicable tax rules. Depending on the existing difference between carrying amount and tax basis, the impairment may reduce a deferred tax liability or create or increase a deferred tax asset. Any resulting deferred tax asset is subject to a realizability assessment and a valuation allowance when required.

What Is The Difference Between An Impairment Loss And Depreciation?

Answer: Depreciation spreads an asset’s cost over its useful life on a planned schedule. An impairment loss is a one-time write-down when the carrying amount can’t be recovered and is above fair value. After an impairment, depreciation continues on the lower amount.

Sources and lesson context

This original guide supports Wiley Intermediate Accounting, section 10.2: Impairments. Its examples and practice questions were created for this article. Current U.S. GAAP is in the FASB Accounting Standards Codification, particularly Topic 360. Linked Statement 144 material is historical background, not a substitute for current Codification text.

About the author: Mansour Farhat, CPA, CIA, DBA, is the instructor behind Farhat Lectures’ video lessons and courses for CPA, CMA, and EA candidates and accounting students.

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