Question

In: Accounting

On 1 July 2018 Alto Ltd purchased land for $4 000 000, in cash. Alto Ltd...

On 1 July 2018 Alto Ltd purchased land for $4 000 000, in cash. Alto Ltd uses the cost model to account for land.

On 1 July 2018 Alto Ltd purchased equipment for $1 000 000, in cash. Alto Ltd uses the revaluation model to account for equipment and depreciates the asset over its estimated useful life of 5 years using the straight-line method. The disposal value at the end of 5 years was assessed as zero.

The following information concerning asset measurement was available:

Fair Value

Costs to Sell

Value in Use

30/6/2019

Land

3 900 000

300 000

3 000 000

Equipment

700 000

nil

1 000 000

30/6/2020

Land

3 400 000

400 000

3 700 000

Equipment

700 000

nil

750 000

Indicators of impairment and/or reversal of impairment existed at relevant dates.

Prepare journal entries to account for Alto ’s land and equipment from 1 July 2018 to 30 June 2020. Journal entries must comply with AASB 116 ‘Property, Plant and Equipment’ and AASB 136 ‘Impairment of Assets’. Show all working and provide any explanations necessary to support your answer.

Solutions

Expert Solution

Date Particulars folio Debit Credit

01.07.18 Land A/c 4000000

Cash A/c    4000000

(Being Land Purchased in Cash)

01.07.18 Equipment A/c 1000000

Cash A/c 1000000

(Being Equipment Purchased in Cash)

30.06.19 Depreciation A/c (1000000/5) 200000

Equipment A/c 200000

(Being Asset Depreciated)

30.06.19 Impairment Loss A/c (WN 1) 130000

Land A/c 130000

(Being Imp. Loss Recorded)

30.06.20   Depreciation A/c (1000000/5) 200000

Equipment A/c 200000

(Being Asset Depreciated)

30.06.19 Impairment Loss A/c (WN 3) 170000

Land A/c 170000

(Being Imp. Loss Recorded)

W N1Calculation of Impairment Loss of Land on 30.06.19:

Recoverable Amount=Fair Value- Cost to Sell

=3900000-300000=3870000

which is greater than Value in Use

Thus, Imp. Loss=4000000-3870000

=130000

W N2Calculation of Impairment Loss of Equipment on 30.06.19:

Recoverable Amount=Fair Value- Cost to Sell

=700000-0=700000

which is smaller than Value in Use

Thus, Reco. Amount=Value in Use=1000000

Thus, Imp. Loss=Carrying Amount after Depn.-Reco. Amount

=(1000000-200000)-1000000

= (200000) ,thus, No Impairment Loss

W N3Calculation of Impairment Loss of Land in 30.06.20:

Recoverable Amount=Fair Value- Cost to Sell

=3400000-400000=3000000

which is smaller than Value in Use

Thus, Reco. Amount=Value in Use=3700000

Thus, Imp. Loss=Carrying Amount-Reco. Amount

=(4000000-130000)-3700000

=170000

W N 4Calculation of Impairment Loss of Equipment in 30.06.20:

Recoverable Amount=Fair Value- Cost to Sell=700000-0=700000

which is smaller than Value in Use

Thus, Reco. Amount=Value in Use=750000

Thus, Imp. Loss=Carrying Amount-Reco. Amount

=(1000000-200000-200000)-750000

=(150000),THUS, NO IMP. LOSS

  


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