Question

On 1 July 2017, Blenheim Ltd purchased an item of machinery for $280,000. On this date it was estimated that the item of machinery had a useful life of seven years and zero residual value. Blenheim Ltd uses the cost model to measure items of property, plant and equipment and the straight-line method of depreciation. Blenheim Ltd has a 30 June reporting date.  

In relation to the item of machinery, Blenheim Ltd has identified indicators of impairment for the reporting periods ending 30 June 2019 and 30 June 2020 and indicators for a reversal of impairment for the reporting period ending 30 June 2021. The fair value less costs of disposal and the value in use of the item of machinery on these dates were as follows:

Date                                                      Fair value less                           Value in use

                                                          costs of disposal

30 June 2019                                                $170,000                                $180,000

30 June 2020                                                   128,000                                  120,000

30 June 2021                                                   125,000                                  130,000

1. Explain how the item of machinery would be accounted for on 30 June 2019 if Blenheim Ltd used the revaluation model to measure items of property, plant and equipment and, on this date, the fair value of the item of machinery was $174,000 and costs of disposal were $4,000.                                                                       

Answer 1

Ans.

computation of carring amount on 30/06/2019

Cost machinery    $280,000

less:Deprecitaion 2017-18 (280000/7) 40000

less:Deprecitaion 2018-19(280000/7) 40000

Carring amount $ 200000

Computation imapairment on june 2019 :

Compare Means

Recoverable amount Higher of NRV or value in use

Imapairment loss

Carring amount Book value

A)Carring amount :200000

B)Recoverable amount : Higher of NRV = 170000( 174000-4000)

value in use =180000

;180000

Impairment loss ; 20000 (A-B)

Adj entry

Impairment loss A/c Dr 20000

to Fixed asset account Cr 20000

machinery account closing balane 200000-20000=180000