A fire at the factory on 1 October 2018 damaged the machine leaving it with a lower operating capacity. The accountant considers that Phoenix Ltd (Phoenix) will need to recognise an impairment loss in relation to this damage. The accountant has ascertained the following information at 1 October 2018: - Phoenix adopts cost model to account for the machine. - The carrying amount of the machine is $60,750. - An equivalent new machine would cost $90,000. - The machine could be sold in its current condition for a gross amount of $45,000. Dismantling costs would amount to $2,000. - In its current condition, the machine could operate for three more years which gives it a value in use figure of $38,685. 1) In accordance with HKAS 36 ‘Impairment of Assets’, which of the following would definitely NOT be an indicator of the potential impairment of an asset (or group of assets)? A An unexpected fall in the market value of one or more assets B Adverse changes in the economic performance of one or more assets C A significant change in the technological environment in which an asset is employed making its software effectively obsolete D The carrying amount of an entity’s net assets being below the entity’s market capitalisation
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.
A fire at the factory on 1 October 2018 damaged the machine leaving it with a lower operating
capacity. The accountant considers that Phoenix Ltd (Phoenix) will need to recognise an
impairment loss in relation to this damage. The accountant has ascertained the following
information at 1 October 2018:
- Phoenix adopts cost model to account for the machine.
- The carrying amount of the machine is $60,750.
- An equivalent new machine would cost $90,000.
- The machine could be sold in its current condition for a gross amount of $45,000.
Dismantling costs would amount to $2,000.
- In its current condition, the machine could operate for three more years which gives it a
value in use figure of $38,685.
1) In accordance with HKAS 36 ‘Impairment of Assets’, which of the following would
definitely NOT be an indicator of the potential impairment of an asset (or group of
assets)?
A An unexpected fall in the market value of one or more assets
B Adverse changes in the economic performance of one or more assets
C A significant change in the technological environment in which an asset is employed
making its software effectively obsolete
D The carrying amount of an entity’s net assets being below the entity’s market
capitalisation
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