Question

Elusive Ltd acquired a machine for $260,000 on 1 July 2017. It depreciated the asset at 10% p.a. on a straight line basis. On 30 June 2019, Elusive Ltd conducted an impairment test on the asset. It determined that the asset could be sold to other entities for $184,000 with costs of disposal of $6,000. Management expects to use the machine for the next four years with expected cash flows from use of the machine being:

2020	$ 80,000
2021	$ 60,000
2022	$ 50,000
2023	$ 40,000

The rate of return expected by the market on this machine is 6%.

Assess whether the machine is impaired. If necessary, provide the appropriate journal entry to recognise any impairment loss.

Answer 1

;Answer:

Carrying Amount of machine at 30 June 2018=$208,000 (=$260000/10*2 years)

Fair Value(FV) less costs of disposal = $178,000 ($184000- $6000)

Calcuation of Value in use as follows

@6%

80000 * 0.9433 = 75464

60000 * 0.8899 = 53394

  50000 * 0.8396 = 41980

40000 * 0.7920 = 31680

  -------------

Recoverable amount $202518

Recoverable amount< Carrying Amount

impairment loss= 208000-202518

Asset is impaired by   = 5482

The Journal entry is...

DR Depreciation –Machine 5482

CR Accumulated depreciation & impairment losses–Machine 5482