Question

ACCOUNTING INTERMEDIATE 2

On 1st January 2014 Alex company dealers of electronic products purchased a building for $8,000,000. Its estimated useful life at that date was 20 years and the company applies straight line depreciation method. On 31st December 2018, the government launched a plan to construct a flyover adjacent to the building and the related construction reduced the access to the building due to the inability to park and enter to the building. Due to this reason the value for the building decreased. The company estimated that they can sell the building for $4,700,000 but it has to incur a cost of $205,000. Alternatively, if it continues to use it the present value of the net cash flows that the building would generate is $5,200,000. In 2019 the government constructed a service road parallel to the highway which improved the recoverable amount to $6,000,000. The depreciation for the year 2019 is $440,000 Calculate the carrying amount, recoverable amount and the necessary journal entries for the above scenario. You are required to:

A.Calculate accumulated depreciation & carrying value as at 31st Dec 2018, applying IAS 36.

B. Calculated recoverable amount & Impairment loss as at 31st Dec 2018 applying IAS 36.

C. Record relevant journal entries as at 31st Dec 2018 applying IAS 36 and amount to be recognized in statement of financial position.

D. Calculated carrying amount and amount of appreciation in building as at 31st Dec 2019 applying IAS 36.

E. Record relevant journal entry for regain in the value of impaired asset as at 31st Dec 2019 applying IAS 36.

F. A customer has made a claim against Alex Company for injury suffered following the purchases and use of a defective electronic product. Legal advisers have confirmed that Alex Company will probably have to pay financial compensation of $50,000 to the customers. In turn, Alex Company has made a counter claim against the suppliers of the defective products for $50,000 and believes it is probable that its claim against the supplier will be successful. Justify with reasons what adjustments, if any, should be made by Alex Company in the financial statements.

Answer 1