Question

In: Accounting

Subject: financial reporting IFRS 5 – Photo processing machine On 1 January 20X1, Michelle Co. bought...

Subject: financial reporting

IFRS 5 – Photo processing machine

On 1 January 20X1, Michelle Co. bought a photo processing machine for €20,000. It had an expected useful life of 10 years and no residual value.

On 31 December 20X2, after 2 years of using the machine, Michelle Co. decides to sell it and steps were taken to locate a buyer. The machines in question are in short supply, so Michelle Co. is confident that the machine will be sold quickly.

Its current market value is €15,000 and it will cost €500 to dismantle the machine and make it available to a purchaser.

Required:
At what value would the machine be stated in Michelle Co.’s Statement of Financial Position
at 31 December 20X2?
Outline the appropriate accounting treatment.

Solutions

Expert Solution

This is a question of Non-Current Assets held for sale(IFRS 5).

To recognise a Property Plant and Equipment as a Non-Current Assets held for sale, the following conditions must be fulfilled:

1.The asset must be available for immediate sale and the sale must be highly probable.

2.There must be a active programme to locate buyers for sale and the management must be commited to sale the asset.

The above conditions are satisfied in the question above and hence we can recognise it as a Non-current asset held for sale.

VALUATION OF NON-CURRENT ASSET HELD FOR SALE: They are valued at the LOWER OF (1)CARRYING VALUE & (2)FAIR VALUE LESS COST TO SELL. ANY REDUCTION IN THE VALUE IS RECORDED AS AN IMPAIRMENT THROUGH THE STATEMENT OF PROFIT & LOSS A/C.

In the question the(1) Carrying Value= €20000 less €4000 =€16000                   (€4000 is the depreciation of 2 years)

(2)Fair value Less cost to sell= €15000 less €500= €14500

So the machine will be valued at lower of the above ie €14500 and the difference of €1500 will be recorded as impairment through profit & loss account.

Journal Entry

Non-current assets-Held for sale A/c (Dr)   €14500

Statement of Profit & Loss A/c (Dr)             €1500

To Property Plant & Equipment A/c (Cr)           €16000


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