Question
It is the accounting policy of ABC Limited to revalue its assets every three years. The company installed a new production line that was available
It is the accounting policy of ABC Limited to revalue its assets every three years. The company installed a new production line that was available for use from 1 January 2015. The production line had a cost of R2 500 000, an estimated useful life of 10 years, and a residual value of R100 000.
On 31 December 2017, the production line was revalued to its net replacement cost of R1 900 000, and a revaluation gain of R120 000 was recognised.
The revaluation surplus is realised on the sale of the assets. At the end of 2019, there were indications that the production line was impaired. Management determined the following values to be applicable on 31 December 2019:
Fair value less costs of disposal R1 100 000
Value in use R1 200 000
Ignore any tax implications
Quaestions:
A) Prepare the journal entries required in the records of ABC Limited for the year ended 31 December 2019 to account for the production line's impairment. (10 marks)
B) On 31 December 2020, ABC Limited determined that the circumstances that lead to the impairment in 2019 no longer existed and that R70 000 of the impairment recognised in 2019 needs to be reversed. Discuss how you would account for the R70 000 reversal of impairment in the records of ABC Limited. (4 marks )
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