Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢22 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 GH¢16 million. The machine is now expected to generate an annual net income of GH¢3.8 million for the next five years at which point the asset would be sold for GH¢4.2 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.
Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢22 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 GH¢16 million. The machine is now expected to generate an annual net income of GH¢3.8 million for the next five years at which point the asset would be sold for GH¢4.2 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢22 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 GH¢16 million. The machine is now expected to generate an annual net income of GH¢3.8 million for the next five years at which point the asset would be sold for GH¢4.2 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.
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