In 2010 the company purchased specialized equipment for $1,150,000. The market value of the equipment at the time of the acquisition was $1,170,000.
Management expects that the equipment will produce the following cash flows: $70,000 for the next 6 years, with a 30% chance that it could be $60,000 each year. Management expects that the residual value will be $40,000 in 6 years.
The risk adjusted rate is 8% and the risk free rate is 6%.
The carrying value of the equipment on December 31st, 2017 is $340,000.
Provide the benefits and any shortcoming of recording it one way versus the other. Provide your recommendation on how the controller of the company should have recorded the asset.