90.2K

Verified Solution

Link Copied!

a) Due to a change in Pusiga Ltds production plans, an item of machinery with a carrying value of GH22 million at 31 December 2016 (after adjusting for depreciation for the year) may be impaired due to a change in use. An impairment test conducted on 31 December 2017, revealed its fair value less cost of disposal to be GH16 million. The machine is now expected to generate an annual net income of GH3.8 million for the next five years at which point the asset would be sold for GH4.2 million. An appropriate discount rate is 8%. Pusiga charges depreciation at 20% on reducing balance method on machinery.

Required:

In accordance with IAS 36: Impairment of Assets, explain with justification the required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31 December 2017. [15 MARKS]

b) Devine Education Ltd acquired an item of plant at a cost of GH800,000 on 1 April 2016. The plant had an estimated residual value of GH50,000 and an estimated useful life of five years, neither of which has changed. Devine Education Ltd uses straight-line depreciation. On 31 March 2018, Devine Education Ltd was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Devine Education Ltd. Even before this information was known, Devine Education Ltd had been having difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant for the next three years will be:

YEAR ENDED	GH000
31ST MARCH 2019	320
31ST MARCH 2020	250
31ST MARCH 2021	190

Devine Education Ltd has confirmed that there is no market in which to sell the plant as at 31 March 2018, but is confident that it can still be sold for its original estimated realisable value on 31 March 2021. Devine Education Ltd's cost of capital is 12%.

Required:

In line with IAS 36: Impairment of Assets, prepare relevant extracts for the plant as at 31 March 2018 after applying any impairment losses. [10 MARKS]

Answer & Explanation Solved by verified expert

See Answer