Question

Plastix Inc. bought a molding machine for $600,000 on July 1, 2017. The company expected to use this machine to extrude plastic toys for the next eight (8) years, when the machine would be sold for $40,000. On July 1, 2020, their major customer, WalMart, gave notification that they were terminating Plastix Inc. as a supplier. Plastix Inc.’s accountants estimate that the machine will generate $360,000 in future cash inflows from other customers and the fair value of the machine is $350,000. Plastix uses straight-line depreciation. What is the impairment loss on July 1, 2020?

Answer 1

1	Impairment Loss= Carrying amount-Recoverable amount
		Carrying amount= Book value of the asset after depreciation on 01.07.2020
		Carrying amount= $600,000-($600,000-40,000)/8 year*3 year)= $600,000-$210,000= $390,000
		Recoverable amount means Higher of:
			Value in use i.e Present value of cashflows (VIU)
			Value in use (VIU)= $360,000
			Fair value less cost of disposal(FVCD)
			Fair value less cost of disposal(FVCD)= $350,000
			Therefore Recoverable amount= $360,0000
		Impairment Loss be done= $390,000-$360,000= $30,000
	Year	Journal Entry			Debit	Credit
	01-07-2020	Impairment Loss-expense ….Dr		$      30,000.00
		Machine					$      30,000.00
		(To record impairment loss on thr machine )