Question

Financial Accounting

The following information was derived from the book of Fast Ltd on 30 June 2019.

	Plant	Vehicle
Carrying amount	?	$64,000
Fair value	$276,000	$63,000
Value in use	$260,000	$63,200
Cost of disposal	$4,000	$500

Additional information:

1. Fast Ltd depreciates all of its Property, Plant & Equipment items at 10% per annum using the straight-line method with zero residual value.

2. The Asset Revaluation Surplus for plant has a credit balance of $7,000 on 30 June 2019, as the result of a revaluation increment on 30 June 2018.

3. Plant was purchased on 1 July 2016 for $400,000.

4. The recoverable amount of vehicle is determined to be $56,500 on 30 June 2020. The vehicle was initially purchased at cost of $80,000.

5. Fast Ltd applies revaluation model for plant and cost model for vehicle.

6. The tax rate is 30%.

7. Fast Ltd’s financial year ends on 30 June each year.

Required:

Prepare the journal entries on 30 June 2019 and 30 June 2020 in relation to the items of Property, Plant & Equipment in accordance to IAS 16/AASB 116 and IAS 36/AASB 136. Show all workings. Narrations for the journal entries are required.

Answer 1

Impairment Loss = Recoverable Amount – Carrying Amount

Revoverable Amount =

        Higher of

A) Fair Value less Cost to disposal

B) Value in Use

Carrying value of plant as on 30^th June, 2019 =

Purchase value on 1 July, 2016= $400000

Less: Dep. For the year 2016-17 to 2018-19 = ($400000 *10%) *3

                                                                           = $120000

Carrying value of plant as on 30^th June, 2019 = 400000-120000 = 280000

Recoverable Amount = Higher of

A) Fair Value less Cost to disposal = 276000-4000 = 272000

B) Value in Use = 260000

= $272000

Impairment Loss of plant = 280000 – 272000 =$8000

Impairment loss of vehicle = 64000- 63200 =$800

Recoverable Amount = Higher of

A) Fair Value less Cost to disposal = 63000-500= 62500

B) Value in Use = 63200

= $63200

Journal Entries for the year ended 30 June, 2019 (Amount in $)

Depreciation A/c                                 48000

                 To plant                                               40000

                 To vehicle                                             8000

(Being Dep. Charged on plant and vehicle)

Impairment Loss A/c                           8800

                 To Plant                                                  8000

                 To Vehicle                                               800

(Being Impairment loss incurred)

Revaluation Reserve A/c                        7000

Profit & Loss A/c                                       1800

                  To Impairment Loss A/c                         8800

(Being Impairment loss charged to Revaluation Res. & P&L A/c)

Year 2019-20

Carrying value of plant as on 30^th June, 2020 = 272000 – (272000/7) =233143

Carrying value of vehicle as on 30^th June, 2020 = 63200 – (63200/8) =55300

Reversal of Impairment Loss = Lower of

A) Recoverable Amount – Carrying Amount = 56500-55300 =1200

B) Carrying Amount if impairment loss has not incurred – carrying amount = 56000- 55300 = 700

= $700

Journal Entries for the year ended 30 June, 2020 (Amount in $)

Depreciation A/c                                 46757

                 To plant                                               38857

                 To vehicle                                             7900

(Being Dep. Charged on plant and vehicle)

Vehicle A/c                                          700

                 To Impairment loss                             700

(Being Impairment loss reversed)