IAS 36 Impairment of assets

Life Spring Water Company purchased a new water filtration equipment on January 1, 2012 for $1M. This equipment is expected to have a useful life of 40 years with no residual value.

By the end of year 3, Life Spring concluded that the filtration system was not performing up to expectation. Its assessment revealed that the equipment has a recoverable amount based on its selling price of $740,000. On January 1, 2017, a technician discovered that the filtration equipment was not installed properly. An adjustment to installation resulted in a significant boost in performance, that led the company to re-evaluate the equipment for impairment. New estimates of future cash flows to be generated through continued operation of the equipment resulted in a recoverable amount of $900,000 based on the value in use and the company determined that it was appropriate to reverse the impairment loss recognized in year 3.

Required:

(a) Calculate the carrying value of the asset at the end of year 3, to determine whether the equipment is

impaired, and calculate the impairment loss if impaired.

(b) Show the journal entry to account for an impairment loss (if any).

(c) What will be the annual depreciation charge, subsequent to the test for impairment?

(d) What is the carrying value of the equipment at the end of 2016.

(e) Calculate what the carrying value would have been if no impairment was taken and show the journal entry

to reflect the reversal of impairment.