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10th Homework - Reversal of Imapirment - Advanced Question

Basim Limited's Statement of Financial Position shows a balance of Rs 550,000 for Property, Plant and Equipment as of December 31, 2018, with annual depreciation charged at Rs 110,000. The company reassessed the recoverable amount on December 31, 2019, leading to a reversal of impairment of Rs 37,401. Journal entries for the year include depreciation and adjustments for impairment, reflecting changes in cash flows and asset valuation.

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28 views2 pages

10th Homework - Reversal of Imapirment - Advanced Question

Basim Limited's Statement of Financial Position shows a balance of Rs 550,000 for Property, Plant and Equipment as of December 31, 2018, with annual depreciation charged at Rs 110,000. The company reassessed the recoverable amount on December 31, 2019, leading to a reversal of impairment of Rs 37,401. Journal entries for the year include depreciation and adjustments for impairment, reflecting changes in cash flows and asset valuation.

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thatsmyboy249
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Question

Statement of Financial position of Basim Limited is showing a balance of Rs 550,000 for Property,
Plant and Equipment as at 31 December 2018. Annual Depreciation is just charged as Rs 110,000.
The plant was acquired on 1 Jan 2016 at a cost of Rs 960,000. Depreciation method was assessed
to be straight line method. The plant was subject to impairment testing at 31 December 2016.
After impairment the annual depreciation was reduced by Rs 10,000. For the last two years the
company is benefiting with reduced depreciation.

On 31 December 2019 the company reassessed the recoverable amount after charging
depreciation. The details of this exercise is as under:

Expected annual cash Flows

Annual Sales of products 345,000


Cost of good sold (120,000)
Operating Costs (58,000)
Maintenance Cost (5,600)
Interest on Working Capital (2,400)
Income Tax Expense (34,500)

Other information
1. These cashflows are subject to a decrease of 5% per anum for the remainder of the term.
2. Applicable discount rate to the company is 10%
3. Fair Value less cost to sell Rs 470,000

Required
Prepare journal entries for the year ended 31 December 2019

Solution

Annual Depre for 2018 110,000


Lower by 10,000
Normal depre (without impair) 120,000

Cost of the asset 960,000


Annual normal depreciation 120,000
Total Useful life assessed to be 8.00

Annual Depreciation reduced by 10,000


Remaining life on 31 Dec 16 7
Impairment amount 70,000

Date Particulars HCA CA P/L


1 Jan 16 Acquisition 960,000 960,000
31 Dec 16 Depreciation (120,000) (120,000)
840,000 840,000 -
31 Dec 16 Impairment (70,000) (70,000)
840,000 770,000 (70,000)
31 Dec 17 Depr (120,000) (110,000) 10,000
720,000 660,000 (60,000)
31 Dec 18 Depr (120,000) (110,000) 10,000
Carrying amount at 31 Dec 18 600,000 550,000 (50,000)

31 Dec 19 Depr (120,000) (110,000) 10,000


480,000 440,000 (40,000)
31 Dec 19 Reversal of Impairment 37,401 37,401
480,000 477,401 (2,599)

Recoverable Amount

Value in use
1 2 3 4
Sales of products 345,000
COGS + Operating Expense (178,000)
Maintenance Cost (5,600)
Net Cash Flows 161,400 153,330 145,664 138,380
PV at 10% 146,727 126,719 109,439 94,516
Value in use 477,401

Fair Value less cost to Sell 470,000

31 December 2019
Depreciation 110,000
Allowance doe Dep 110,000
PPE 37,401
Reversal of impairment 37,401

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