Impairment of assets (18 marks)

Denga Ltd has a machine that originally cost R1 000 000 and is depreciated on a straight-line basis over its useful life and with a residual value of R50 000. On 31 December 20.19, the asset had a carrying amount of R525 000. As a result of new technology in the market, the business now expects this machine will produce less in revenue than expected originally. On 31 December 20.19 the remaining useful life of the asset was 5 years.

The machine can at this stage be disposed at R370 000. Any broker involved in such a transaction will charge a fee of R2 000 and the cost to dismantle and remove the asset will be R3 000. The asset was serviced to ensure that it is in good working condition and the technician charged R2 000. Advertising cost will be to R750 in total.

The budgeted future cash flows for the next five years, after considering the impact of the cut in revenue are as follows:

Inflows Outflows

20.20 R62 000 R1 000

20.21 67 000 2 000

20.22 74 000 4 000

20.23 80 000 4 000

20.24 81 000 2 000

It is estimated that the machine can at the end of year 5 be sold for R6 000. The expected costs of the disposal at the end of year 5 is estimated at R2 000.

NB: Assume an after tax discount rate of 7,2% (tax rate 28%) (Use two decimal places for the discount rate)

REQUIRED:

5.1 Fair value less cost to sell

5.2 Value in use.

5.3 Impairment loss, if any. If not, provide a reason why there is no impairment loss

5.4 Depreciation for the following year and the years thereafter