Question
Zeltec Inc. has 800 hectares of agricultural land as part of its property, plant, and equipment. The land had an original cost of $4.4 million,
Zeltec Inc. has 800 hectares of agricultural land as part of its property, plant, and equipment. The land had an original cost of $4.4 million, which is also its reported value as at June 30, 2021. Zeltec rented out this land under a five-year lease that expired on June 30, 2021, at an annual rent of $400 per hectare. The company follows the cost model for measuring the land. Due to the current state of the agricultural sector, the board of directors is concerned about whether the value of the land has been impaired. The new rental lease agreement requires rental payments of $350 per hectare for the five years beginning July 1, 2021, with the first payment due on July 1, 20212020. There is no indication that rental values will increase in the foreseeable future. The land was formally appraised as at July 1, 2021, and that appraisal indicated a market value, if sold, of $4,800 per hectare, with estimated selling costs of $100,000. Required: a) Explain to the board of directors whether impairment has occurred and, if so, prepare the journal entry required to reflect the impairment in the accounts for the year to June 30, 2021. Assume the required rate of return is 7%. The company follows IFRS for reporting purposes. b) What are the disclosure requirements for the year end June 30, 2021? (Hint: Land is assumed to have an unlimited life, and the rental income is assumed to be indefinite.)
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