Question

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On 1 Jan. 2015, Miles Ltd. acquired a machine for $300,000 cash. The machine has an...

On 1 Jan. 2015, Miles Ltd. acquired a machine for $300,000 cash. The machine has an estimated useful life of 10 years with no residual value. On 31 December 2016, based on evidence that the machine was impaired, the company estimated the recoverable amount of the machine to be $200,000. On 31 December 2018, there was evidence for reversal of impairment of the machine and the recoverable amount on this date was $170,000. Assume there is no change in the useful life of the machine. Miles Ltd. measured its machines using the cost model and adopts straight-line depreciation for its machines.

Prepare all relevant entries relating to this machine for 2015 to 2018.

Solutions

Expert Solution

Recognition of assets under the cost model:

Both US GAAP and IFRS require an item of property, plant, and equipment to be measured at its cost. It includes purchasing price, discounts, custom duties, transportation costs, installation and assembly costs, professional fees, and any other directly attributable costs.

Entry in the general journal debits the asset account (e.g., buildings, machinery, or office equipment) and credits Cash or Accounts Payable if an asset is acquired on credit.

Depreciation is entered in the general journal at the end of each accounting period by debiting Depreciation Expense and crediting Accumulated Depreciation.

If asset impairment is recognized, it must be recorded in the general journal. The debited account is Impairment Loss, and the credited account is Accumulated Impairment Losses.

Under the cost model, only IFRS allows reversal of impairment losses recognized in the past. The entry debits Accumulated Impairment Losses and credits Gain on Revaluation.

Depreciation expense depends on the following:

  • depreciable amount (difference between cost of an asset and its residual value)
  • estimation of useful life
  • depreciation method

Under the cost model, the depreciation schedule remains unchanged until impairment or reversal of impairment is made.


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