Question

On 1 July 2018, Maxwell Chemical Ltd acquired a plant at a cost of $1,000,000. Maxwell depreciated the assets on a straight line basis. As at 30 June 2020, the machinery had accumulated depreciation of $200,000 and an expected remaining useful life of four years. On 30 June 2020, Maxwell Chemical Ltd conducted an impairment test on asset. It was assessed that the plant could be sold to other entities for $600,000 with costs of disposal of $25,000. The management expect to use the plant for another four years and it is expected that net cash flow to be generated by the plant would be $195,000 over each of the next four years.

The rate of return by the market on this plant is 8% as at 30 June 2020.

Note: The present value of an annuity of $1 for four years discounted at 8 per cent is $3.3121

Required:

(a)  Determine whether the plant is impaired. If so, provide appropriate journal entry at 30 June 2020.                                                                                                         

(b) Provide the journal entry to account for the depreciation in 2021.   

Answer 1