Question

On January 1, 2019, Company X has an asset with a cost of $300,000 and accumulated

depreciation of $120,000. Estimated future cash inflows are $150,000 and the fair value

is $125,000. There is a 5-year remaining life and the company uses straight-line

depreciation. The asset will continue to be used in operations. At the beginning of

2020, Company X determines the fair value of the asset to be $160,000. Prepare entries

for 2019 and 2020.

IFRS: Assume the same facts except that Company X uses IFRS. Prepare the necessary

journal entries for 2019 and 2020.

Answer 1

Ans. As per standard on impairment loss Carrying value of asset is higher of :-

Value in use or

Fair market value

Any difference between book value and higher of above two is considered as impairment loss. (Book Value - Higher of value in use or fair market value)

so here in our question,

Value in use = $ 1,50,000

Fair Value = $ 1,25,000

Higher of above two = $ 1,50,000

Book value of asset = $ 3,00,000 - $ 1,20,000 = $ 1,80,000

Impairment loss = $ 1,80,000 - $ 1,50,000 = $ 30,000

Depreciation on new value = $ 1,50,000 / 5 = $ 30,000

Entry For 2019 :-

Impairment loss A/c Dr $ 30,000

To Asset A/c $ 30,000

Depreciation Expense A/c Dr. $ 30,000

To Accumulated Depreciation A/c $ 30,000

Value of asset at the end of 2019 = $ 1,20,000 (1,80,000 - 30,000 - 30,000)

Entry For Year 2020 :-

Book Value Of asset = $ 1,20,000

Fair Value = $ 1,60,000

Gain = $ 40,000

Remaining useful life = 4 years

Depreciation for the year = $ 1,60,000 / 4 = $ 40,000

Asset A/c Dr. $ 40,000

Revaluation Gain on asset $ 40,000

Depreciation A/c Dr $ 40,000

Accumulated Depreciation A/c $ 40,000