Exercise 11-22 Assume that Headlands is a private company that follows ASPE. No.
ID: 2556387 • Letter: E
Question
Exercise 11-22
Assume that Headlands is a private company that follows ASPE.
No.
Date
Account Titles and Explanation
Debit
Credit
December 31, 2017
December 31, 2018
December 31, 2018
SHOW LIST OF ACCOUNTS
Repeat the requirements in (a) above assuming that Headlands is a public company that follows IFRS. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No.
Date
Account Titles and Explanation
Debit
Credit
December 31, 2017
December 31, 2018
December 31, 2018
Exercise 11-22
The information that follows relates to equipment owned by Headlands Limited at December 31, 2017:Cost $10,440,000 Accumulated depreciation to date 1,160,000 Expected future net cash flows (undiscounted) 8,120,000 Expected future net cash flows (discounted, value in use) 7,366,000 Fair value 7,192,000 Costs to sell (costs of disposal) 58,000
Assume that Headlands will continue to use this asset in the future. As at December 31, 2017, the equipment has a remaining useful life of four years. Headlands uses the straight-line method of depreciation.
Explanation / Answer
As per ASPE (Accounting Standards for Private Enterprise)
ASPE determines an impairment loss as the excess of the carrying amount above fair value.
Under ASPE, testing for impairment is a two-step process:
Carrying amount = Cost – accumulated depreciation
9,280,000 = 10,440,000 – 1,160,000
Expected undiscounted cash flow = 8,120,000
If carrying value > undiscounted cash flows; Impairment loss = carrying value – fair value
Therefore Impairment loss = 9,280,000 - 7,192,000
= 2,088,000
Journal entry
31 Dec 2017 Impairment loss A/c Dr 2,088,000
To Accumulated Impairment losses A/c Cr 2,088,000
Cost of equipment 10,440,000
Less: Accumulated Depreciation 1,160,000
Impairment loss 2,088,000
Therefore depreciable amount 7,192,000 / 4 years (remaining useful life)
Depreciation under straight line method 1,798,000
31 Dec 2018 Depreciation A/c Dr. 1,798,000
To Accumulated depreciation A/c Cr. 1,798,000
31 Dec 2018 Therefore no journal entry.
IAS 36 Impairment of Assets determines an impairment loss as the excess of the carrying amount above the recoverable amount (the higher of fair value less costs to sell and value in use).
Carrying amount = Cost – Accumulated depreciation – accumulated impairment loss
9,280,000 = 10,440,000 – 1,160,000 – 0
Now, compare 9,280,000 carrying amount with recoverable amount (higher of fair value 7,192,000 – 58,000 cost to sell = 7,134,000 and value in use 7,366,000 (Expected discounted cash flow)
Therefore recoverable amount is 7,366,000
Impairment loss = 9,280,000-7,366,000
1,914,000.
Journal entry:
To Accumulated impairment loss A/c Cr. 1,914,000
To Accumulated depreciation A/c Cr. 1,841,500
Depreciation for 2018 :
Cost of equipment 10,440,000
Less : Accumulated Depreciation 1,160,000
Impairment loss 1,914,000
Therefore depreciable amount 7,366,000 / 4 years (remaining useful life)
Depreciation under straight line method 1,841,500
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