Question

ABC Ltd acquired a machine for $750 000 on 1 July 2018. The machine had a useful life of five years and was depreciated on a straight-line basis with no disposal value. ABC Ltd adopts the cost model for accounting for assets in this class. ABC Ltd makes the following estimates of the value of the machine:

Date	Net selling price	Value in use	Fair Value
30 June 2019	$550 000	520 000	590 000
30 June 2020	$460 000	420 000	490 000

Indicators of impairment were identified on 30 June 2019, while indicators of a reversal of impairment were found on 30 June 2020.

REQUIRED: Prepare journal entries relating to this asset from 30 June 2019 to 30 June 2020. Show the steps of impairment (or reversal of impairment) tests. Show all working (step by step).

Answer 1

Date	Particulars	Debit ($)	Credit ($)
30-Jun-19	Depreciation expense	150000
	Accumulated depreciation		150000
	To record depreciation for the year (750000/5)
	Carrying value of the asset = 750000-150000 = 600000
	Fair value less costs to sell = 550000
	Value in use = 520000
	Higher of above both = 550000
	Carrying value is greater than higher of fair value and value in use
	Impairment loss = Carrying value - Fair value = 600000-550000 = 50000
30-Jun-19	Loss on impairment	50000
	Machinery		50000
	To record impairment loss
30-Jun-20	Depreciation expense	150000
	Accumulated depreciation		150000
	To record depreciation for the year (750000/5)
	Carrying amount of machine = 550000-150000 = 400000
	Fair value less costs to sell = 460000
	Value in use = 420000
	Higher of above both = 460000
	Amount of impairment recorded = 50000
	As fair value is higher, impairment loss can be reversed.
30-Jun-20	Machinery	60000
	Loss on impairment		50000
	Gain in value of asset		10000
	To reverse the impairment loss recorded