- 12 Marks
FR – L2 – Q34 – Impairment of Assets
Question
The following is relevant to three tangible non-current assets held by Chantelle (Ghana) Ltd.
Machine 1 was purchased on 1 January Year 1 for GH¢420,000. It had an estimated residual value of GH¢50,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 6 Chantelle (Ghana) Ltd revalued this machine to GH¢275,000 and reassessed its total useful life as fifteen years. On 1 January Year 7 an impairment review showed machine 1’s recoverable amount to be GH¢100,000 and its remaining useful life to be five years.
Machine 2 was purchased on 1 January Year 1 for GH¢500,000. It had an estimated residual value of GH¢60,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 7 this machine was classified as held for sale, at which time its fair value was estimated at GH¢200,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢210,000.
Machine 3 was purchased on 1 January Year 1 for GH¢600,000. In Year 1 depreciation of GH¢30,000 was charged. On 1 January Year 2 this machine was revalued to GH¢800,000 and its remaining useful life assessed as eight years. On 1 January Year 7 this machine was classified as held for sale, at which time, its fair value was estimated at GH¢550,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢550,000.
Tax is at the rate of 30%.
Required
For each machine show the effect of the above on profit or loss, other comprehensive income and revaluation reserve of Chantelle (Ghana) Ltd in Year 7. You should also show the brought forward balance on the revaluation reserve (at 1 January Year 7) in respect of machines 1 and 3.
Answer
Effect on Year 7 profit or loss
| Machine 1 | Machine 2 | Machine 3 | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Impairment loss | (107,500) | (41,000) | – |
| (W1) | (W2) | ||
| Depreciation charge | (20,000) | – | – |
| (100,000 ÷ 5) | |||
| Gain on disposal | – | 15,000 | – |
| (210,000 – 195,000 (W2)) |
Effect on Year 7 other comprehensive income
| Machine 1 | Machine 2 | Machine 3 | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Revaluation reserve | (28,000) | – | – |
| Deferred tax | 12,000 | – | – |
Revaluation reserve brought forward at 1 January Year 7
- Machine 1:
Cost (1 January Year 1): GH¢420,000
Depreciation to 1 January Year 6: ((420,000 – 50,000) ÷ 10 × 5) = GH¢185,000
Carrying amount at 1 January Year 6: 420,000 – 185,000 = GH¢235,000
Revalued to: GH¢275,000
Revaluation reserve: 275,000 – 235,000 = GH¢40,000
Depreciation Year 6: (275,000 ÷ 10) = GH¢27,500
Transfer to retained earnings: ((275,000 – 235,000) ÷ 10) = GH¢4,000
Revaluation reserve at 1 January Year 7: 40,000 – 4,000 = GH¢36,000 - Machine 3:
Cost (1 January Year 1): GH¢600,000
Depreciation Year 1: GH¢30,000
Carrying amount at 1 January Year 2: 600,000 – 30,000 = GH¢570,000
Revalued to: GH¢800,000
Revaluation reserve: 800,000 – 570,000 = GH¢230,000
Depreciation to 1 January Year 7: ((800,000 ÷ 8) × 5) = GH¢500,000
Transfer to retained earnings: ((800,000 – 570,000) ÷ 8 × 5) = GH¢143,750
Revaluation reserve at 1 January Year 7: 230,000 – 143,750 = GH¢86,250
Workings
(1) Machine 1
In the year to 31 December Year 7, the impairment loss is GH¢147,500. Of this, GH¢40,000 reverses the gain in the previous year. The revaluation reserve is reduced by GH¢28,000 and the deferred tax liability by GH¢12,000. The remaining impairment loss of GH¢107,500 is written off as a loss in Year 7.
(2) Machine 2
| GH¢ | |
|---|---|
| 1 January Year 1 Cost | 500,000 |
| Depreciation to 1 January Year 7 (((500,000 – 60,000) ÷ 10) × 6) | (264,000) |
| Carrying amount on 1 January Year 7 | 236,000 |
| Fair value minus cost to sell (200,000 – 5,000) | (195,000) |
| Impairment loss | 41,000 |
(3) Machine 3
| GH¢ | |
|---|---|
| 1 January Year 1 Cost | 600,000 |
| Depreciation to 1 January Year 2 | (30,000) |
| Carrying amount on 1 January Year 2 | 570,000 |
| Revalued to | 800,000 |
| Taken to revaluation reserve/deferred tax (70%/30%) | 230,000 |
| Carrying amount on 1 January Year 2 | 800,000 |
| Depreciation to 1 January Year 7 ((800,000 ÷ 8) × 5) | (500,000) |
| Carrying amount on 1 January Year 7 | 300,000 |
| Fair value on classification as held for sale | 550,000 |
| Value at lower of carrying amount and fair value less costs to sell: therefore | 300,000 |
- Topic: Impairment of Assets
- Uploader: Samuel Duah