In: Accounting
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.
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