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
Required
Explain and calculate the ceiling beyond which the carrying amount of the item of machinery cannot be increased on 30 June 2021 when reversing any previously recognised impairment losses. What is the purpose of the ceiling?
As per the IAS 36 - Impairment of assets, the maximum amount (ceiling) beyond which carrying amount cannot be increased more than what the depreciated historical cost would have been if the impairment had not been recognised
In the present question,
Original (Historical) cost of the assset is = $280000
Less: Depreciation for 4 years = 40000 x 4 = $160000
Thus, the ceiling would be = depreciated historical cost i.e. $280000 - $160000 = $120000
The maximum reversal of previous impairment losses can be made upto $120000
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