SCENARIO FOUR

Dalaso Plc acquired a piece of machine on 1 June 2017 at a cost of K200,000. This cost is before taking into account trade discount of 5% that Dalaso Plc received on the same date. On 1 June 2018, the machine was revalued to K159,000.

During the year to 31 May 2019, there was a reduction in the use of the machine because of decline in demand for Dalaso Plcs products as a consequence of new entrants in the market. This prompted Dalaso Plc to review the machine for impairment. At 31 May 2019, the machine had a fair value less costs to sell of K86,000. Further, Dalaso Plc expects the machine to generate net inflows of K45, 000 in each of the last two years of its remaining economic useful life.

Dalaso Plc has a policy of transferring to retained earnings an amount representing realised revaluation surplus. Machines are depreciated using straight line method at an annual rate of 25%. Dalaso Plc uses an annual discount rate of 10%.

The machine is recorded in the financial statements of Dalaso Plc based on 31 May 2018 carrying value of K142,500.

Note: Assume the machine has a nil residual value at the end of its economic useful life.

Required

Write a report to the Chief Executive Officer that explains:

How the above transactions will be treated in the financial statements of Dalaso Plc for the year ended 31 May 2019. (8 marks)

Note: Include relevant calculations in your explanations.