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Brickell Corporation purchased a new machinery at the beginning of 2020 at a cost of $200,000....

Brickell Corporation purchased a new machinery at the beginning of 2020 at a cost of $200,000. The machinery is expected to have a useful life of 10 years and no residual value. The straight-line method of depreciation is used. Adverse economic conditions develop in 2022 that result in a significant decline in demand for Brickell’s products. At December 31, 2022 the company develops the following estimates related to the machinery:

• Expected future cash flows: $150,000

• PV of expected future cash flows: $110,000

• Selling price: $140,000

• Cost of disposal: $14,000

At the end of 2024, Brickell’s management determines that there has been a substantial improvement in economic outlook, resulting in a strengthening of demand for Brickell’s products. The following estimates related to the machinery are developed at December 31, 2024:

• Expected future cash flows: $140,000

• PV of expected future cash flows: $106,000

• Selling price: $100,000

• Cost of disposal: $14,000

Required:

1. Determine the carrying amounts for the machinery reported on the balance sheet at the end of years 2020-2024 and the amounts to be reported in the income statement related to the machinery for years 2020-2024.

Solutions

Expert Solution

This question has been answered in accordance with IFRS. In case if the answer is required as per US GAAP, please let us know.

Year 2020

Deprication in Income Statement = 200,000/10= 20,000

Carrying value = 200,000-20,000 = 180,000

Year 2021

Deprication in Income Statement = 200,000/10= 20,000

Carrying value = 180,000-20,000 = 160,000

Year 2022

Deprication in Income Statement = 200,000/10= 20,000

Impairment in Income statement- 14,000.

If Carrying value(140,000)>Assets recoverable amount,there is a impairment loss. Assets recoverable amount is greater of following-

  • Fair value - cost to sell = 140,000-14,000 =126,000
  • Assets value in use i.e Pv of future cash flow=110,000

Therefore 126,000 is asset recoverable amount. Since, Carrying value (140,000)> asset recoverable amount(126,000), there is an impairment loss of 140,000 - 126,000= 14,000.

Carrying value =160,000-20,000-14,000=126000

Year 2023

Deprication in Income Statement= 126,000/7= 18000

Carrying value = 126,000-18000= 108,000

Year 2024

Deprication in Income Statement= 126,000/7= 18000

Reversal of impairment loss in Income statement = On reversal, the asset’s carrying amount is increased, but not above the amount that it would have been without the prior impairment loss

If no impairment loss was recognised in year 2022, the carrying value of machine would have been 100,000.The carrying value on December 31, 2024 after considering deprication is 108,000-18000=90,000. The assets value in use is 106,000.

Therefore, the maximum reversal that can be done in Income Statement is 10,000.

Carrying value = 108000-18000+10000= 100,000

ekkarill92 answered 1 year ago
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