In: Accounting
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.
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.
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