Question
Uny Company has the following machine of carrying amount of $860m at 31 December 20X1. Because the machine is used to produce a specific product,
Uny Company has the following machine of carrying amount of $860m at 31 December 20X1. Because the machine is used to produce a specific product, it is possible to identify the cash flows arising from its use. The management believes that the value of the machine may have become impaired, because a major competitor has developed a superior version of the same product. As a result, sales are expected to fall. The following additional information is relevant:
(i) Future cash inflows arising from the sale of the product :
$m
20X2 370
20X3 320
20X4 260
(ii) It is estimated that the machine could be sold at $700m, but selling cost of $60m is expected to be incurred. (Note: the interest rate for the years 20X2, 20X3 and 20X4 are assumed to be 10%. Use the method as illustrated at lecture to calculate the value in use)
Required: (a) Calculate the impairment loss and the revised carrying amount of the asset that will be reported in the accounts of Uny Company for financial year ended 31 December 20X1. (b) Show journal entries to record the impairment loss calculated in (a) above.
(c) Explain the rationale for the determination of the recoverable amount of the property, plant and equipment and the calculation of the impairment loss.
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