Question 2

On 1 July 2017, Neon Ltd purchased an item of machinery for $140,000. On this date it was estimated that the item of machinery had a useful life of seven years and zero residual value. Neon Ltd uses the cost model to measure items of property, plant and equipment and the straight-line method of depreciation. Neon Ltd has a 30 June reporting date.

In relation to the item of machinery, Neon Ltd has identified indicators of impairment for the reporting periods ending 30 June 2019 and 30 June 2020 and indicators for a reversal of impairment for the reporting period ending 30 June 2021. The fair value less costs of disposal and the value in use of the item of machinery on these dates were as follows:

DateFair value lessValue in use

costs of disposal

30 June 2019$85,000$90,000

30 June 202064,00060,000

30 June 202162,50065,000

Required

(a) Prepare the journal entries to account for any impairment losses in relation to the item of machinery on 30 June 2019 and/or 30 June 2020.

(b) Explain and calculate the ceiling beyond which the carrying amount of the item of machinery cannot be increased on 30 June 2021 when reversing any previously recognised impairment losses. What is the purpose of the ceiling?

(c) Prepare the journal entry on 30 June 2021 to account for the reversal of any previously recognised impairment losses.

Explain how the item of machinery would be accounted for on 30 June 2019 if Neon Ltd used the revaluation model to measure items of property, plant and equipment and, on this date, the fair value of the item of machinery was $87,000 and costs of disposal were $2,000.