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On 1 July 2017, Blenheim Ltd purchased an item of machinery for $280,000. On this date...

On 1 July 2017, Blenheim Ltd purchased an item of machinery for $280,000. On this date it was estimated that the item of machinery had a useful life of seven years and zero residual value. Blenheim Ltd uses the cost model to measure items of property, plant and equipment and the straight-line method of depreciation. Blenheim Ltd has a 30 June reporting date.  

In relation to the item of machinery, Blenheim Ltd has identified indicators of impairment for the reporting periods ending 30 June 2019 and 30 June 2020 and indicators for a reversal of impairment for the reporting period ending 30 June 2021. The fair value less costs of disposal and the value in use of the item of machinery on these dates were as follows:

Date                                                      Fair value less                           Value in use

                                                          costs of disposal

30 June 2019                                                $170,000                                $180,000

30 June 2020                                                   128,000                                  120,000

30 June 2021                                                   125,000                                  130,000

Prepare the journal entry on 30 June 2021 to account for the reversal of any previously recognised impairment losses.               

Solutions

Expert Solution

On 1 july 2017 - Purchase of Machinary

Machinary a/c Dr 280000

To Cash/ Vendor a/c 280000

on 30 june 2018 - Depreciation

Depreciation a/c Dr 40000

To Machinary a/c 40000

on 30 june 2019 - Depreciation

Depreciation a/c Dr 40000

To Machinary a/c 40000

Indicators of impairement exists on 30 june 2019

Workings for calculation of depreciation

Recoverable amount higher of

1 Fair value less cost to sell

2 Value in use

So, Recoverable amount (higher of 180000 or 170000)

i.e. 180000

Carrying amount is 200000

As carrying value is more than recoverabe amount so the asset will be impaired by 20000 (i.e. 200000-180000)

Impairement a/c Dr 20000

TO Machinary a/c 20000

New Carrying amount is 180000

Now on 30 june 2020 Depreciation

Depreciation a/c Dr 36000

To Machinary a/c 36000

Indicators of impairement exists on 30 june 2020

Recoverable amount (higher of 120000 or 128000)

i.e. 128000

Carrying amount is 144000 (180000-36000)

As carrying value is more than recoverabe amount so the asset will be impaired by 16000 (i.e. 200000-180000)

Impairement a/c Dr 16000

TO Machinary a/c 16000

New Carrying amount is 128000

Now on 30 june 2021 Depreciation

Depreciation a/c Dr 32000

To Machinary a/c 32000

Carrying Amount 96000

Reversal of impairement

Impairement loss recognised previously can be reversed only to the extent of lower of re-estimated recoverable amount and carrying amount had no impairement.

Calculations of reversal

carrying amount if no depreciation - 120000

recoverable amount - 130000

carrying amount after impairement - 96000

reversal will be lower of re-estimated recoverable amount and carrying amount had no impairement - re-estimated recoverable amount and carrying amount had no impairement

ie 120000 - 96000 = 24000

Machinary a/c Dr 24000

To Impairement gain 24000

Note - Please feel free to ask for any concern for this question.

# PLEASE UPVOTE IF FOUND USEFUL


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