Chapter 7 Exam Preparation Question (Impairment)

This topic has 3 replies, 4 voices, and was last updated 8 months ago by francihco.

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June 26, 2021 at 2:43 pm #626389
radhika1
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Hello,

This question is from the OpenTuition lecture notes:

I have a question on how the depreciation was calculated for Shea Co on the office building after impairment. The value after impairment is $14m and I calculated depreciation to be:
= $14m/10 years remaining useful life*(6/12) = $700k

But the answer is showing $500k depreciation. I was just wondering how this was calculated?

Many thanks in advance!
October 3, 2021 at 4:45 pm #636929
losercase
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HI, could you please reply tp this. even I had the same question
October 4, 2021 at 11:59 am #636963
f6ali
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I would suggest either don’t attempt the question, or if you do attempt it, do it without looking at the answer. The answer provided in the notes is incorrect.

I have found following inconsistencies in the answer:

1. The example specifies use of 10% reducing balance method for depreciating factories, but the answer applies Straight Line depreciation using 20 years useful life.

2. If 10% reducing balance method is used, there’d be no impairment at all!

3. The depreciation charge of $500k arises because it is assumed that the remaining life after impairment is 14 years, which doesn’t take into account the revision of useful life. Even then the figure is incorrect as 14 years will be the useful life on 1 January 20X8, which is before impairment.

The notes will be updated in due time with correction. Thank you for pointing out the mistake.
October 25, 2021 at 6:15 am #639031
francihco
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Thanks for this thread. Were the notes updated after all?
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