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Company B leases construction machineries to local building sub-contractors for many years. On 1 January 2014, Company B purchased 20 units of construction road rollers. The invoice price was $1,800,000 per unit. They were all delivered to Company B on 28 Feb 2014. Installation costs of $200,000 were also incurred for installing these 20 units on 28 Feb 2014. The invoice prices and the installation costs were all settled on 5 March 2014.
The draft financial statement for the end of the reporting period of 31 December 2015 included the construction road rollers with carrying amounts of $21,720,000 which were bought on 1 Jan 2014. The depreciation policy for construction machineries are 20% per year without any residual value.
However, on 31 Dec 2015, the construction market has suddenly turned down due to several new government legislations on construction industry. Therefore, Company B estimated that each construction road rollers would be able to generate $400,000 cash per annum in remaining years and the scrap values of these 20 units of construction road rollers were totally $3,000,000. The discounting rate was applied as 15% per annum.
Company B also estimated that if they were sold to second hand market, the value of each construction road roller was $1,050,000. Disposal costs of $200,000 would be incurred for selling all 20 units of construction road rollers together.
On 31 Dec 2016, Company B confirmed that further impairment adjustments were not needed after the impairment review of year 2016.
Required: Journal entries for 2014, 2015, 2016 in accordance with PPE & impairment loss
1 Jan 2014 Dr. Purchase ($1,800,000/unit x 20 unit) $36,000,000
Cr. Payables $36,000,00028 Feb 2014 Dr. Machineries $36,000,000
Cr. Purchase $36,000,000Dr. Installation costs $200,000
Cr. Payables $200,0005 March 2015 Dr. Payables ($36,000,000+$200,000) $36,200,000
Cr. Bank $36,200,000Fair value less cost of disposal = $10,500,000 – $200,000 = $850,000
Value in use= $400,000/(1+15%) + $400,000/(1+15%)2 + $400,000/(1+15%)3 =$913,290
*I calculated VIU like this, because the machines are fully depreciated after 3 years start from the date 31 Dec 2015 that the construction road rollers would be able to generate $400,000 cash per annum. Is it correct?Also, I cannot understand how to use the figure of the scrap values ($3,000,000).
Recoverable Amount = $913,290
Impairment loss= (21,720,000 – 913,290)=$20,806,71031 March 2015
Dr. Accumulated Dep. ($36,200,000-$21,720,000) $14,480,000
Cr. Machineries $14,480,000
Dr. Impairment Loss $20,806,710
Cr. Machineries $20,806,710And How to make entries in 2016?
Please help. Thanks a lot
You wouldn’t debit purchases here:
“1 Jan 2014 Dr. Purchase ($1,800,000/unit x 20 unit) $36,000,000
Cr. Payables $36,000,00028 Feb 2014 Dr. Machineries $36,000,000
Cr. Purchase $36,000,000”The 1 January journal would be:
Dr Machines $36,000,000
Cr Payables $36,000,000This one “Dr. Installation costs $200,000
Cr. Payables $200,000”would be
Dr Machines $200,000
Cr Payables $200,000This entry “5 March 2015 Dr. Payables ($36,000,000+$200,000) $36,200,000
Cr. Bank $36,200,000”is incorrect by a full year – it should be 5 March, 2014
And you appear to have forgotten to depreciate for the year ended 31 December, 2014
Correct that depreciation error and then repost if you still have a problem
OK?
is it
Annual Depreciation =36,200,000 x20%= $7,240,00031 Dec 2014, 2015,2016
Dr. Depreciation expenses $7,240,000
Cr. Accumulated Depreciation $7,240,000For all 3 years?
Could you tell me whether my approach to the impairment loss is correct or not?
Also, the last statement “On 31 Dec 2016, Company B confirmed that further impairment adjustments were not needed after the impairment review of year 2016.” Is this statement implied something? Do I need to make entries?
Thank you
Also, I would like to ask whether the entries of revaluation surplus transfer to retained earnings need to make when the residual value or useful life is changed?
This line is incorrect:
“Fair value less cost of disposal = $10,500,000 – $200,000 = $850,000”
“I calculated VIU like this, because the machines are fully depreciated after 3 years start from the date 31 Dec 2015 that the construction road rollers would be able to generate $400,000 cash per annum. Is it correct?”
Yes, correct
“Also, I cannot understand how to use the figure of the scrap values ($3,000,000).”
Find the present value of the scrap proceeds in 3 years’ time and add on to arrive at ‘value in use’
“Recoverable Amount = $913,290”
This is for each machine so now you need to multiply by 20 … and then compare with carrying value to arrive at the impairment
Then, once you have impaired, calculate depreciation on the newly impaired figure
OK?
“Also, I would like to ask whether the entries of revaluation surplus transfer to retained earnings need to make when the residual value or useful life is changed?”
I don’t understand this question – I see no sign of any revaluation surplus
Why this is incorrect “Fair value less cost of disposal = $10,500,000 – $200,000 = $850,000”?
Recoverable Amount = $913,290
Impairment loss= (21,720,000 – 913,290)=$20,806,71031 Dec 2014
Dr. Depreciation expenses (36,200,000 x20%) $7,240,000
Cr. Accumulated Depreciation $7,240,00031 Dec 2015?
Dr. Depreciation expenses $7,240,000
Cr. Accumulated Depreciation $7,240,00031 March 2015
Dr. Accumulated Dep. ($36,200,000-$21,720,000) $14,480,000
Cr. Machineries $14,480,000
Dr. Impairment Loss $20,806,710
Cr. Machineries $20,806,710(is it only eliminate the Accumulated Depreciation when impairment loss occurred?)
31 March 2016
Dr. Depreciation expenses $7,240,000
Cr. Accumulated Depreciation $7,240,000Carrying amount of 31 March = Cost ($36,200,000) – Accumulated depreciation ($7,240,000?x 3 = 21,720,000) – Accumulated impairment $20,806,710 = -6,326,710
Is it like this? the Impairment Loss from last year becomes Accumulated impairment?I feel confused how to make entries after impairment loss, please help
Because $10,500,000 – $200,000 = $10,300,000
You either need a new calculator or you need to be more careful when putting the figures into your abacus
That recoverable amount of $913,290 is for each one of those 20 machines whereas $21,720,000 is the aggregation of all the machines. You need to multiply $913,290 by 20 to arrive at recoverable amount = $18,265,800 and THAT’S the figure that you are comparing with carrying value to determine the impairment
You’ve dated the impairment loss as 31 March, 2015 ie before the 2015 depreciation
You need to look at those dates again
Your impairment journal entry is a nonsense … probably because your impairment calculation was $17,352,510 over-stated
(To be honest with you, the application of a little bit of common sense would have told you that a group of 20 very expensive machines with a carrying value of $21+ million are unlikely to be impaired down to less than $1 million … that’s a write-off of around 95%!)
Your March 2016 depreciation is nonsense! How can you depreciate by $7,240,000 an asset that has been impaired down to $913,290?
Your last line has left me speechless! You calculate the carrying amount as $-6,326,710 ie a negative asset of over $6 million … where on the statement of financial position are you going to show this? And are you going to depreciate these heavy rollers by another $7,240,000 for each of the next two years
That would result in a figure of $-20,816,710
Follow through your answer again paying particular attention to those places where I have indicated errors and then post again if you need to
OK?
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