Question

On January 1, 2012, Vallahara Company purchased machinery for $650,000, which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of $50,000. Late in 2016, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of 5 years, over which it estimates the asset will produce total cash inflows of $1,000,000 and will incur total cash outflows of $825,000. The cash flows are independent of the company’s other activities and will occur evenly each year. Vallahara is not able to determine the fair value based on a current selling price of the machinery. Vallahara’s discount rate is 10%.

Required:

1.	Prepare schedules to determine whether, at the end of 2016, the machinery is impaired and, if so, the impairment loss to be recognized.
2.	If the machinery is impaired, prepare the journal entry to record the impairment.
3.	If Vallahara uses IFRS and determines that the fair value of the machinery is $200,000 and that it would cost $10,000 to sell the machine, how much would the company recognize as the impairment loss?
4.	Assuming that the recoverable amount of the machinery is determined to be $220,000 at the end of 2017, what entry will Vallahara make to record this increase in value under U.S. GAAP? Under IFRS?

CHART OF ACCOUNTS
Vallahara Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 125 Notes Receivable 141 Inventory 152 Prepaid Insurance 184 Machine 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 221 Notes Payable 224 Interest Payable 231 Salaries Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 523 Salaries Expense 531 Bad debt Expense 532 Depreciation Expense 539 Miscellaneous Expenses 540 Interest Expense 891 Loss on Impairment

If the machinery is impaired, prepare the journal entry to record the impairment at December 31, 2016 under US GAAP.

PAGE 10

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare schedules to determine whether, at the end of 2016, the machinery is impaired and, if so, the impairment loss to be recognized. Additional Information

Complete the Recoverability Test and determine the results of the test.

Vallahara Company

Recoverability Test

December 31, 2016

1	Book Value:
2	Machinery (cost)
3	Less: Accumulated Depreciation
4	Book Value
5	Undiscounted future cash flows:
6	Undiscounted future cash flows

The book value is   than the undiscounted expected net cash flows so Vallahara   recognize an impairment loss at December 31, 2016.

Complete the Impairment Analysis to determine the amount of the loss (if any) under US GAAP at December 31, 2016.

Vallahara Company

Impairment Analysis (US GAAP)

December 31, 2016

1	Fair Value:
2	Machinery (book value)
3	Present Value of the Expected Net Cash Flows
4	Impairment Loss (if any)

If Vallahara uses IFRS and determines that the fair value of the machinery is $200,000 and that it would cost $10,000 to sell the machine, how much would the company recognize as the impairment loss? Complete the Impairment Analysis for IFRS..

Vallahara Company

Impairment Analysis (IFRS)

December 31, 2016

1	Fair Value
2	Costs to sell
3	Book Value
4	Impairment Loss (if any)

Assuming that the recoverable amount of the machinery is determined to be $220,000 at the end of 2017, what entry will Vallahara make to record this increase in value under IFRS on December 31, 2017?

PAGE 12

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	Dec. 31	Machine		10,000.00
2		Loss on Impairment			10,000.00

No entry is made under IFRS

PAGE 12

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	Dec. 31	Machine		30,000.00
2		Loss on Impairment			30,000.00

Assuming that the recoverable amount of the machinery is determined to be $220,000 at the end of 2017, what entry will Vallahara make to record this increase in value under U. S. GAAP on December 31, 2017?

No entry is made under U.S. GAAP

PAGE 12

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	Dec. 31	Machine		10,000.00
2		Loss on Impairment			10,000.00

PAGE 12

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	Dec. 31	Machine		30,000.00
2		Loss on Impairment			30,000.00

Answer 1

1	Prepare schedules to determine whether, at the end of 2016, the machinery is impaired and, if so, the impairment loss to be recognized
	Impairment Test
	Machinery cost							650000
	Less : Accumulated Depreciation (5*50000)							250000
	Book Value							400000
	Undiscounted expected net cash flows - (200000-165000)							35000
	Undiscounted expected net cash flows - 5*35000							175000
	Cash Inflow		1000000/5		200000
	Cash Outflow		825000/5		165000
	Since $ 175000 is less than the book value of machine of $ 400000, the machine is impaired and therefore an impairment loss is recognised
	Calculation of Impairment loss
	Present value of expected net cash flows
	Years	Cash flow	Discount factor @ 10%	Present Value
	1	35000	0.909091	31818.18
	2	35000	0.826446	28925.62
	3	35000	0.751315	26296.02
	4	35000	0.683013	23905.47
	5	35000	0.620921	21732.25
				132677.5
	Impairment Loss - 400000-132678				267322
2	If the machinery is impaired, prepare the journal entry to record the impairment.
	Loss on Impairment				$267,322
	To Machine					$267,322
	Instead of Machine, Accumulated Depreciation - Machine can be credited
3	If Vallahara uses IFRS and determines that the fair value of the machinery is $200,000 and that it would cost $10,000 to sell the machine, how much would the company recognize as the impairment loss?
	Fair Value Less Costs				190000
	The fair value is more than the present value of use of $ 132678. therefore, the company under IFRS would use the value of $ 190000
	Impairment Loss = 190000-400000					-210000
4	Assuming that the recoverable amount of the machinery is determined to be $220,000 at the end of 2017, what entry will Vallahara make to record this increase in value under U.S. GAAP? Under IFRS?
	Under U.S GAAP, restoration of impairment loss is not permitted. Therefore, under U.S. GAAP Vallahara would continue to depreciate machinery on $ 132678
	If Vallahara uses IFRS, the impairment loss can be reversed if the recoverable amount subsequently increases.
	However the amount to be increased cannot be more than the book value.
	If there was no impairment Vallahara would have book value of (400000-50000)									$350,000
	Therefore, Vallahara can restore the entire increase of $ 30000 (220000-190000)									$30,000
	Machine			$30,000
	To Loss on Impairment				$30,000