Question

Question 2

KOL Limited purchased a machine on 1 January 2018 at $500,000. It has an expected useful life of 5 years and an estimated salvage value of $50,000. It is also expected that the machine can run for 30,000 hours. For the year ended 31 December 2018, KOL has used the machine for 4,000 hours.

KOL has another equipment with the following data on 31 December 2018.

Required:

e. Discuss when a company should perform an impairment review for a long-lived tangible asset, and when it is impaired.

f. Determine the impairment loss for the equipment on 31 December 2018

g. Compute the asset turnover for the shop.

h. Compute the profit margin on sales for the shop.

i. Compute the return on assets for the shop.

Answer 1

e.	Impairement test for the recoverability of an asset whenever the circumstances indicate that its carrying amount may not be recoverable. Examples of such situations are: Cash flow. There are historical and projected operating or cash flow losses associated with the asset. Costs. There are excessive costs incurred to acquire or construct the asset. Disposal. The asset is more than 50% likely to be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Legal. There is a significant adverse change in legal factors or the business climate that could affect the asset’s value. Market price. There is a significant decrease in the asset’s market price. Usage. There is a significant adverse change in the asset’s manner of use, or in its physical condition.
f.	Impairment loss is booked when carrying amount of equipment exceeds higher of fair value of equipment and value in use.
	Higher of : Value in use $ 175,000                      Fair value less cost to sell $180,000
	Impairment loss = $200,000 - $ 180,000 = $20,000
g	Asset turnover ratio = Sales/ average assets
	= 79,644/125,717
	0.634 times
h	Profit margin = net income/net sales*100
	=5,584/79,644*100
	7.011%
i.	Return of assets = Net income/average assets*100
	=5,584/125,717
	4.442%