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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—————- 214,600On 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?
I do not understand why we take 214600?It is cumulative amount of 2015 2016 and 2017 but it says 31 march 2015 why not 109200?I Stuck here
Could u explain?
| QUOTE June 4, 2017 at 7:32 pm
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MikeLittleKeymaster
The figure $214,600 is the value in use of the plantValue in use is described as “the present value of future cash flows” generated by this plant
That value in use is then compared with the net selling price and the higher of those figures is the recoverable amount
The recoverable amount is then compared with the carrying value and the lower figure is the value to be incorporated into the financial statements
Look on page 77 of the free course notes
Last time you explained it but i did not understand.I know recoverable amount is measured by FV less cost to disposal and value in use but the case here is that if it says on 31 march 2015 but we take present values of all amounts not the amount 109200 on 31 march 2015?
214600 is the amount of all there years 2015 2016 2017 and it says the question below why 214600 not 109200 on 31 march 2015?At what value should the plant appear in Metric’s statement of financial position as at 31 March 2015?
Today I have exam over F7 and after two hours may exam will start
“I do not understand why we take 214600?It is cumulative amount of 2015 2016 and 2017 but it says 31 march 2015 why not 109200?”
$109,200 does NOT represent the present value of future cash flows. $109,200 represents the present value of just one of those future cash flows
However, I don’t know what the suggested solution says is the correct answer but let’s look at it again:
Carrying value at 31 March, 2015 = $248,000 – 12.5% depreciation = $217,000 carrying value … just before Metric decides that useful life is just 2 more years
OR ….
Carrying value at 31 March, 2015 = $248,000 – 1/3 depreciation = $165,333 carrying value … because Metric decides on 1 April, 2014 that useful life is just 3 more years
(Question is unclear as to when that “just 3 more years’ decision was made)
At 31 March, 2016, net selling price was $200,000 (the offer from the third party) and value in use as at 31 March, 2016 was the present value of 2 more years income = $66,400 + $39,000 = $105,400
The higher of value in use and net selling price is $200,000 and, when we compare that with carrying value, we arrive at either $34,667 impairment necessary ($200,000 – $165,333) or $17,000 impairment ($217,000 – $200,000)
The final figure is dependent upon at what date we are considering this impairment and at what date we decided there was only 3 more years to run!
But it’s too late now because, by the time you read this, the examination is over and you can rest for a few weeks (and so can I!)
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