Juan Company purchased four convenience store buildings on January 1, 2015 for a total of P25,000,000. The buildings have been depreciated using the straight-line method with a 20-year useful life and 10% residual value. On January 1, 2021, Juan has converted the buildings into a hotel and restaurant. Because of the change in the use of the buildings, Juan is evaluating the buildings for possible impairment. Juan estimates that the buildings have a remaining useful life of 10 years, that their residual value will be zero, that net cash inflows from the buildings will total P1,500,000 per year, and that the current fair value of the four buildings totals P10,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at 12% for 10 periods is 5.65. What impairment loss should be recognized for 2021?
Juan Company purchased four convenience store buildings on January 1, 2015 for a total of P25,000,000. The buildings have been depreciated using the straight-line method with a 20-year useful life and 10% residual value. On January 1, 2021, Juan has converted the buildings into a hotel and restaurant. Because of the change in the use of the buildings, Juan is evaluating the buildings for possible impairment. Juan estimates that the buildings have a remaining useful life of 10 years, that their residual value will be zero, that net cash inflows from the buildings will total P1,500,000 per year, and that the current fair value of the four buildings totals P10,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at 12% for 10 periods is 5.65. What impairment loss should be recognized for 2021?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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.
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