Question

Entity A owns a motor van that was involved in an accident at the year-end of 2019. It is barely useable, so the value in use is estimated at $1,500,000. However, the motor van is a common model and there is a demand for its parts. This results in the fair value of $3,600,000 and costs of disposal of $100,000 respectively.

On 1 January 2019, the carrying amount of the motor van was $8,000,000 and the van was estimated to have a remaining useful life of 8 years.

REQUIRED:

According to accounting standards, measure the amount of impairment loss of the motor van for the Year 2019 and prepare the relevant journal entries related to the impairment loss on 31 December 2019.

ACCOUNT NAMES FOR INPUT:

| Plant | Motor van | Machine | Land | Building | Bank | Payable | Receivable | No entry |

| Retained earnings | Other income | Other expense |Interest expense | Interest revenue |

| Depreciation | Accum. depreciation | Impairment loss | Reversal of impairment loss |

| Restoration liability | Loss on disposal | Gain on disposal | Revaluation surplus | Revaluation deficit |

ANSWERS:

The amount of impairment loss = $

Journal Entries:

Date	Account Name	Debit ($)	Credit ($)	Hints For Items If Necessary
31-Dec-19
				Judge Dr/Cr side.
				Judge Dr/Cr side.
				Judge Dr/Cr side.
				Judge Dr/Cr side.
				Judge Dr/Cr side

Answer 1

Impairment loss = Carrying amount - Recoverable amount

=> 7,000,000 - 3,500,000 => $ 3,500,000

Journal entries

Impairment loss Dr 3,500,000

Motor van Cr 3,500,000

(To record impairment of motor van)

Notes

1.Carrying amount (end of 2019) = Cost -depreciation

=>8,000,000 - 1,000,000 (8,000,000 / 8 years) => 7,000,000

2.Recoverable amount = $3,500,000 (Higher of Fair value less cost to sell = 3,600,000 - 100,000 => 3,500,000 and Value in use = 1,500,000 )

The recoverable amount is assessed only when there is an indication that the asset may be impaired. Recoverable amount is the higher of (a) fair value less costs to sell and (b) value in use.

3.Depreciation only after the impairment should be computed based on the revised value. Hence depreciation for 2019 is computed based on the original estimate of useful life and its Purchase cost.