Question

Mybank Ltd acquired some machinery at a cost of $2 000 000. As at 30 June 2022 the machinery had accumulated depreciation of $400 000 and an expected remaining useful life of four years. On 30 June 2022 it was determined that the machinery could be sold at a price of $1 200 000 and that the costs associated with making the sale would be $50 000. Alternatively, the machinery is expected to be useful for another four years and it is expected that the net cash flows to be generated from the machine would be $390 000 over each of the next four years. It is assessed that at 30 June 2022 the market would require a rate of return of 6 per cent on this type of machinery. a) Explain and show calculations of why an impairment loss needs to be recognised in relation to the machinery.

b) Provide the appropriate journal entry at 30 June 2022 to account for the impairment.

c) Provide the journal entry to account for depreciation in 2023.

Answer 1

a)
	Carrying amount	Fair value less costs of disposal	Value in use	Recoverable amount	Impairment loss
30-Jun-22	1,600,000.00	1,150,000.00	1,351,389.00	1,351,389.00	248,611.00
Fair value less costs of disposal (1200000-50000)	1,150,000.00
Value in use = $390,000 x PVOA(4,6%) = $390 000 x 3.4651 =	1,351,389.00
Impairment Loss = $(1,600,000 – 1 351 389) =	248,611.00
b) Journal entries for Impairment los		Debit	Credit
30-Jun-22	Impairment loss	248,611.00
	Accumulated impairment losses—machinery	248,611.00
	To recognise impairment loss incurred in 2020
c)
Calculation of depreciation expense in 2023
Carrying amount after impairment assessment = Cost – Accumulated Depreciation  – Accumulated impairment loss	1351389
Useful life	4
Depreciation expense	337847.25
		Debit	Credit
30-Jun-23	Depreciation Expense	337,847.25
	Accumulated depreciation—machinery		337,847.25
	Depreciation expense for the year ended in 30 June 2023