It is the accounting policy of Orico Limited to revalue its assets every three years. Revaluation is done based on the net replacement cost, and the revaluation surplus is realized on the sale of the assets. On revaluation, accumulated depreciation is set off against the gross carrying amounts.
The company bought a new manufacturing machine that was available for use from 1 July 2015. The manufacturing machine was purchased for R2 500 000 and had an estimated useful life of 10 years, with a residual value of R100 000. Depreciation is written off using the straight-line basis. On 30 June 2018, the manufacturing machine was revalued to its net replacement cost of R1 900 000, and a revaluation gain of R120 000 was recognized.
At the end of the 2020 financial year, there were indications that the manufacturing machine was impaired. Management determined the following values to be applicable on 30 June 2020:
• Fair value less costs of disposal R1 100 000
• Value in use R1 200 000
Ignore any tax implications.
REQUIRED:
2.1) Prepare the journal entries required in the records of Orico Limited for the financial year ending 30 June 2020 to account for the manufacturing machine’s impairment.
2.2) On 30 June 2021, Orico Limited determined that the circumstances that lead to the impairment in 2020 no longer existed and that R70 000 of the impairment recognized in 2020 needs to be reversed. Discuss how you would account for the R70 000 reversal of impairment in the records of Orico Limited