Green Light Ltd (GLL) tested a machine for impairment on 31 December 2018. The machine was carried at depreciated historical cost, and its carrying amount was $150,000. It had an estimated remaining useful life of 10 years. GLL's accounting policy required all property, plant and equipment's recoverable amount was determined on the basis of value-in-use calculation, using a discount rate of 15%. The management of GLL estimated the future net cash flows of the machine using reasonable assumptions. The following information related to future net cash flows of the machine was available at the end of 2018. Year Future net cash flow ('000) 2019 22,165 2020 21,450 2021 20,550 2022 24,725 2023 25,325 2024 24,825 2025 24,123 2026 25,533 2027 24,234 2028 22,850 Suppose in the years 2019-2021, no event occurred that required the machine's recoverable amount to be re-estimated. On 31 December 2022, costs of $25,000 were incurred to enhance the machine's performance. Revised estimated cash flows of the machine in management's most recent budget were as follows: Year Future net cash flow ('000) 2023 30,321 2024 32,750 2025 31,721 2026 31,950 2027 33,100 2028 27,999 With reference to the machine, answer the following questions. (a) Determine the impairment loss at 31 December 2018. Show your workings. (b) Prepare the accounting journal entries to record the impairment loss on 31 December 2018. (c) Prepare the accounting journal entries for the reversal of impairment loss on 31 December 2022. Show your workings.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Asset Impairment
Green Light Ltd (GLL) tested a machine for impairment on 31 December 2018. The machine was carried at depreciated historical cost, and its carrying amount was $150,000. It had an estimated remaining useful life of 10 years. GLL's accounting policy required all property, plant and equipment's recoverable amount was determined on the basis of value-in-use calculation, using a discount rate of 15%. The management of GLL estimated the future net
Year Future net cash flow ('000)
2019 22,165
2020 21,450
2021 20,550
2022 24,725
2023 25,325
2024 24,825
2025 24,123
2026 25,533
2027 24,234
2028 22,850
Suppose in the years 2019-2021, no event occurred that required the machine's recoverable amount to be re-estimated. On 31 December 2022, costs of $25,000 were incurred to enhance the machine's performance. Revised estimated cash flows of the machine in management's most recent budget were as follows:
Year Future net cash flow ('000)
2023 30,321
2024 32,750
2025 31,721
2026 31,950
2027 33,100
2028 27,999
With reference to the machine, answer the following questions.
(a) Determine the impairment loss at 31 December 2018. Show your workings.
(b) Prepare the accounting
(c) Prepare the accounting journal entries for the reversal of impairment loss on 31 December 2022. Show your workings.
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