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Sir
Metric owns an item of plant which has a carrying amount of $248,000 as at 1 April 2014. It is being depreciated at 12½% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in sales. Metric has estimated that the plant will be retired from use on 31 March 2017.
The estimated net cash flows from the use of the plant and their present values are:
Net cash flows Present values
$ $
Year to 31 March 2015 120,000 109,200
Year to 31 March 2016 80,000 66,400
Year to 31 March 2017 52,000 39,000
–––––––– ––––––––
252,000 214,600
–––––––– ––––––––
On 1 April 2015, Metric had an alternative offer from a rival to purchase the plant for $200,000.
At what value should the plant appear in Metric’s statement of financial position as at 31 March 2015?
A $248,000
B $217,000
C $214,600
D $200,000Sir I dont understand why the value in the sofp shouldnt be the carrying amount of 217 000 as it is higher.
It has only three more years of estimated useful life so $248,000 needs to be depreciated over 3 years, not at 12.5% reducing balance
That’s one reason why it’s not $217,000
Another reason why it’s not $217,000 is because value in use at 31 March is just $66,400 + $39,000 = $105,400 unrolled by 10% (because we are one year further on) so $115,940 and net selling price is $200,000. According to the standard on impairments, we need to consider the higher of these two and compare that figure with the carrying value, and take the lower of that comparison.
The higher figure is $200,000
Carrying value will at 31 March 2015 be $248,000 less one year’s depreciation of $82,667 giving a cv of $165,333
$165,333 compared with $200,000 gives me an impaired cv of $165,333
But again, I’m struggling because that’s not one of the options 🙁
The dates in this question make the problem difficult. At what date is this impairment review taking place?
1 April, 2014 makes sense because we are given three years’ worth of estimated future revenue
But we don’t receive the offer of $200,000 until 1 April, 2015
If we do the impairment review exercise at 1 April, 2014, relevant figures are cv of $248,000, viu of $214,600 and nsp of $?????? So, in the absence of any figure for nsp the answer should be $214,600
If we do the review at 31 March, 2015, relevant figure are cv $165,333, viu of $115,940 and nsp of $200,000 so, if my logic is correct, the answer should be $165,333
I’m not sure that that helps you!
thanks Sir, f7 is really interesting. But Sir why 3 years instead of 12.5%
Because it’s going to be retired from use after 2017 according to the question
ok Sir, so if the question gives the retirement date, I can ignore the depreciation rate and work with the remaining useful life?
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