- 3 Marks
FR – Nov 2018 – L2 – Q2b- Financial Reporting Standards and Their Applications
This question relates to the impairment test of an asset, applying IAS 36.
Question
Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢11 million at 31 December 2017 (after adjusting for depreciation for the year) may be impaired due to a change in use. An impairment test conducted on 31 December 2017 revealed its fair value less cost of disposal to be GH¢5 million. The machine is now expected to generate an annual net income of GH¢2 million for the next three years at which point the asset would be sold for GH¢2.4 million. An appropriate discount rate is 10%. Pusiga charges depreciation at 20% on a reducing balance method on machinery.
Note:
- The present value of ordinary annuity of GH¢1 at 10% for one year, two years, and three years is 0.909, 1.736, and 2.487 respectively.
- The present value of GH¢1 at 10% for one year, two years, and three years is 0.909, 0.826, and 0.751 respectively.
Required:
In accordance with IAS 36: Impairment of Assets, explain with justification the required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31 December 2017.
Find Related Questions by Tags, levels, etc.
- Tags: Depreciation, Discounted Cash Flow, IAS 36, Impairment of Assets, machinery, Net Income
- Level: Level 2
- Topic: Financial Reporting Standards and Their Applications
- Series: NOV 2018