On January 1, 2016, Tiger LLC acquired a PPE for $ 3,000,000 expecting to use it

Question

On January 1, 2016, Tiger LLC acquired a PPE for $ 3,000,000 expecting to use it to produce oil for 15 years.

The PPE was depreciated on a straight-line method.

By the end of 2020, the demand for oil had drastically dropped that Tiger LLC expects that the net cash flows out of the oil will be lesser than the net carrying value of the PPE.

The value in use was estimated at $ 900,000, while the estimated net selling price on January 2021 is $825,000

Tasks: (1) determine the carrying value as of December 31, 2020

            (2) Determine the amount of the impairment if any.

Explanation / Answer

1) Cost of PPE 3000000 Life 15 years Date of purchase Jan 1, 2016 Depreciation per annum (3000000/15) 200000 Carrying value as on Dec 31, 2020 ($3000000-($200000*5) 2000000 2) Impairment loss = Carrying amount - Recoverable amount Recoverable amount is higher of value in use and net selling price Here the value in use of $900000 is higher than the net selling price of $825000 Hence impairment loss = $2000000-$900000 = $1100000

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