Six years ago Moline Industries acquired a new machine to use in its primary man

Question

Six years ago Moline Industries acquired a new machine to use in its primary manufacturing operations. The machine cost $47 million and the company expected the machine to have a ten-year useful life with a zero salvage value. The company uses straight-line depreciation for the asset. However, because of changes within the industry, Moline reevaluated the machine at the end of Year 6 and estimated that the machine is capable of generating undiscounted future cash flows of $12 million. Based on the quoted market prices of similar assets, Moline estimates the fair value of the machine at $10.5 million.

Required:

a. What is the machine’s book value at the end of Year 6?

b. Should Moline recognize an impairment of the asset? Why or why not? If yes, what amount?

c. At the end of Year 6, what amount should the machine be listed at on Moline’s balance sheet? Is the accounting treatment any different if reported under the IFRS?

Explanation / Answer

a.] Book value at the end of Year 6 = machine cost - Accumulated depreciation till 6 years

= $47000000 - ([$47000000 / 10 years] * 6 years)

= $47000000 - $28200000

= $18800000

Note:-    straight-line depreciation  = ([$47000000 / 10 years] * 6 years)

= $28200000

b.] IF the book value of asset is greater than the undiscounted future cash flows, then there will be  impairment of the asset. So yes ,Moline should recognize an impairment of the asset in Income Statement

Impairment loss = Book value at the end of Year 6  - fair value

   = $18800000 - $10500000

= $8300000

c.] At fair value amount (reevaluated amount)that is $10500000 the machine should be listed on Moline’s balance sheet for remaining life of machine

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