Question
On 1 July 2017, Ocean plc acquired and installed an item of machinery for use in its manufacturing business. When acquired at cost of 1,200,000,
On 1 July 2017, Ocean plc acquired and installed an item of machinery for use in its manufacturing business. When acquired at cost of 1,200,000, the machine had an estimated useful life of ten years and an expected residual value of zero. Ocean depreciates machinery on a straight-line basis over its useful life.
At the end of the 2019 reporting period (30 June 2019), the annual review of all machinery found that this particular item of machinery had incurred significant damage. Thus, the engineering department estimated the fair value less costs to sell the machinery at the end of the reporting period was 710,000. As the machinery can operate in a limited capacity, it is expected to provide annual net cash flows of 105,000 for the next eight years (assumed to occur at the end of reporting periods). The expected residual value will remain unchanged. The management of Ocean uses a discount rate of 8% for calculations of this kind.
REQUIRED Determine whether Ocean has incurred an impairment loss in relation to the asset. If so, provide the journal entry necessary to recognise any impairment in the machine.
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