On January 1, 2012, Vallahara Company purchased machinery for $650,000, which it
ID: 2577245 • Letter: O
Question
On January 1, 2012, Vallahara Company purchased machinery for $650,000, which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of $50,000. Late in 2016, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of 5 years, over which it estimates the asset will produce total cash inflows of $1,000,000 and will incur total cash outflows of $825,000. The cash flows are independent of the company's other activities and will occur evenly each year. Vallahara is not able to determine the fair value based on a current selling price of the machinery. Valahara's discount rate is 10%. Required: 1. Prepare schedules to determine whether, at the end of 2016, the machinery is impaired and, if so, the impairment loss to be recognized. 2. If the machinery is impaired, prepare the journal entry to record the impairment. 3. If Vallahara uses IFRS and determines that the fair value of the machinery is $290,000 and that it would cost $10,000 to sell the machine, how much would the company recognize as the impairment loss? 4. Assuming.that the recoverable amount of the machinery is determined to be $220,000 at the end of 2017, what entry will Vallahara make to record this increase in value under U.S. GAAP? Under IFRS?
Explanation / Answer
1 calculation of the impairment loss present value of the cash flows for 5 years at the end of 2016 cash inflows per year 1000000 / 5 200000 cash outflows per year 825000 / 5 165000 1 years 1 2 3 4 5 2 cash inflows 200000 200000 200000 200000 200000 3 cash outflows 165000 165000 165000 165000 165000 4 net cash in flows ( 2 - 3 ) 35000 35000 35000 35000 35000 5 PVRF at 10% 0.909090909 0.82645 0.75131 0.68301 0.62092 6 present value cash flows ( 4 * 5 ) 31818.18182 28925.6 26296 23905.5 21732.2 7 total present value cash flows 132678 book value of the machine at the end of 2016 cost of the machine 650000 salvage value 50000 net value ( 650000 - 50000 ) 600000 number of years 12 depreciation per year 600000 / 12 depreciation per year 50000 depreciation of 2012 to 2016 4 years depreciation of 2012 to 2016 50000 * 4 depreciation of 2012 to 2016 200000 net book value as on 2016 650000 - 200000 net book value as on 2016 450000 value in use 132678 impairment loss net book value as on 2016 - present value of the cash inflows impairment loss 450000 - 132678 impairment loss to be recognised 317322 net book value as on 2016 450000 - 317322 net book value as on 2016 132678 2 journal entry account total debit credit impairment loss 317322 accumulated impairment loss 317322 3 calculation of impairment loss sale value 290000 cost of sale 10000 net sale value 280000 present value of cash inflows 132678 value in use higher of net sale proceeds or present value of the cash inflows value in use higher of 280000 or 132678 value in use 280000 impairment loss net book value as on 2016 - 280000 impairment loss 450000 - 280000 impairment loss to be recognised 170000 4 entry to record the increase in the amount taking the sub part 1 as base , the sub part 4 has been solved net book value as on 2016 132678 depreciation per year net book value as on 2016 -salvage value / number of years depreciation per year 132678 - 50000 / 5 depreciation per year 82678 / 5 depreciation per year 16536 net book value as on 2017 132678 - 16536 net book value as on 2017 116142 machinery increase in value 220000 journal entry account total debit credit accumulated impairment loss 220000 gain in value of building 220000 to record the increase in value of the building
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