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Hi Mike!
I am having some issue dealing with the a question in the BPP kit. Please help!
A machine has a carrying amount of $85,000 at the year end of 31 March 20X9. Its market value is $78,000 and costs of disposal are estimated at $2,500. A new machine would cost $150,000. The company which owns the machine expects it to produce net cash flows of $30,000 per annum for the next three years. The company has a cost of capital of 8%.
What is the impairment loss on the machine to be recognised in the financial statements at 31 March 20X9?1. The answer is $7687
2. To obtain the amount for value in use, the cash flow of $30,000 has been used. This cashflow relates to the new machine and not the existing machine. So why it has been used?3. How to obtain the answer?
Thanks.
“This cashflow relates to the new machine and not the existing machine”
What makes you think that?
Value in use is the present value of $30,000 for each of the next three years
Year 1 $30,000 / 1.08 = $27,777
Year 2 $27,777 / 1.08 = $25,720
Year 3 $25,720 / 1.08 = $23,815The total of those 3 amounts is $77,312
This is initially compared with net selling price $75,500 ($78,000 – $2,500) to find recoverable amount (the higher of value in use compared with net selling price)
So recoverable amount is $77,312
This is now compared with carrying value to determine (a) whether the asset is impaired and (b) if it is, by how much
The comparison is $85,000 carrying value with $77,312 recoverable amount and the impairment is therefore $7,688
OK?
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