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Wilderness owns and operate an item of plant that cost $640,000 and had accumulated depreciation of $400,000 at 1st October 20×4. It is being depreciated and 12.5% on cost. On 1st April 20×5 (exactly half way through the year) the plant was damaged when the factory vehicle collided into it. Due to the unavailability of the replacement parts, it is not possible to repair the plant. but it still operates, albeit at a reduced capacity.
Also, it is expected that as a result of the damage the remaing life of the plant from the date of the damage will be only two years. Based on it’s reduced capacity, the estimated present value of the plant in use is $150,000. The plant has a current disposal value of $20,000 (which will be nil in two years time), but Wilderness has been offered a trade in value of $180,000 against a replacement machine which has a cost of $1 million (there would be no disposal costs for the replaced plant).
Wilderness is reluctant to replace the plant as it is worried about the long-term demand for the produce produced by the plant. The trade in value is only available if the plant is replaced.
Required: Prepare the extracts from the Statement of Financial Position and Statement of Profit and Loss of Wilderness in respect of the plant for the year ended 30 September 20×5.
My answer:
From 1st October x4 to 1st April x5 (collision date) depreciation charge was 15,000 ($240,000 x 12.5% x 6/12).
I picked the Recoverable Amount of 180,000 as its higher from it’s present value of future cash flow which is 170,000 (150000 + 20000).
Depreciation charge for the next 6 months of accounting period is 11,250 ( 180000 x 12.5% x 6/12)
Profit and Loss extract therefore will show an impairment loss of 45000 and depreciation charge of 26250 (15000 + 11250)
Statement of Profit and Loss will show the carrying value of plant 168750.
Am I right, sir?
Sadly, no!
The question clearly tells us that depreciation is 12.5% ON COST. Cost was 640,000 so annual depreciation is 80,000 and a half year is therefore 40,000. That gives a carrying value of 200,000 as at collision date
Value in use we are told is 150,000 but the disposal value is as at today and value in use is over the next two years. The disposal value cannot be included in that value in use figure
Net selling price is 180,000
Recoverable amount is therefore 180,000 (it’s higher than 150,000) and compares with carrying value (200,000) so the asset needs to be impaired down to 180,000 and depreciated over two years at 90,000 per annum
Depreciation for the year to 30 September is 85,000 (40,000 + 45,000) and carrying value is 135,000 (180,000 – 45,000)
Impairment is 20,000
I think that does it!
Impairment of plant
The plant had a carrying amount of $240,000 on 1 October 20X7. The accident that may have caused impairment occurred on 1 April 20X8 and an impairment test would be done at this date. The depreciation on the plant from 1 October 20X7 to 1 April 20X8 would be $40,000 (640,000 × ?12 and one half?% × ?6 over 12?) giving a carrying amount of $200,000 at the date of impairment.
An impairment test requires the plant’s carrying amount to be compared with its recoverable amount. The recoverable amount of the plant is the higher of its value in use of $150,000 or its fair value less costs of disposal. If Wilderness trades-in the plant it would receive $180,000 by way of a part exchange, but this is conditional on buying new plant which Wilderness is reluctant to do. A more realistic fair value is the plant’s current disposal value of only $20,000. Therefore, the recoverable amount would be its value in use of $150,000 giving an impairment loss of $50,000 ($200,000 ? $150,000). The remaining effect on profit or loss would be a depreciation charge for the last six months of the year. As the damage has reduced the remaining life to only two years (from the date of the impairment) the remaining depreciation would be $37,500 ($150,000 ÷ 2 years × ?6 over 12?).Extracts from the financial statements for the year ended 30 September 20X8 would be:
Statement of financial position
Non-current assets $
Plant (150,000 ? 37,500) 112,500Statement of profit or loss
Plant depreciation (40,000 + 37,500) 77,500
Plant impairment loss 50,000
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