On January 1, 2010, Desert Company purchased a machine for $820,000. At the time, management estimated the useful life to be 20 years with a salvage value of $80,000 and will use straight-line depreciation. On January 1, 2020, the company reviewed the asset for impairment and determined that its future net cash flows totaled $420,000 and its fair value was $360,000. Desert has decided to continue to use the machine. What is the amount of depreciation expense Desert will record for this machine in 2020 after accounting for any potential impairment?

$42,000

Explanation:

Straight line depreciation charges a fixed amount of depreciation for the period the asset is used in the business.

Depreciation Expense = Cost - Salvage Value ÷ Estimated Useful Life

January 1, 2020

Carrying Amount

Cost - Accumulated depreciation = $450,000

Recoverable Amount :

Higher of Fair Value and Future Cash Flows

Recoverable Amount = $420,000

Impairment loss incurs when Carrying Amount > Recoverable Amount

therefore,

Impairment loss = $30,000

December 31 , 2020

Depreciation expense = New Depreciable Amount ÷ Remaining useful life

                                     = $420,000 ÷ 10

                                     = $42,000