Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 2016 for ` 60 lakhs. The machine was expected to have a productive life of 6 years. At the end of financial year 2016-2017 the carrying amount was ` 41 lakhs. A short circuit occurred in this financial year but luckily the machine did not get badly damaged and was still in working order at the close of the financial year. The machine was expected to fetch ` 36 lakhs, if sold in the market. The machine by itself is not capable of generating cash flows. However, the smallest group of assets comprising of this machine also, is capable of generating cash flows of ` 54 crore per annum and has a carrying amount of ` 3.46 crore. All such machines put together could fetch a sum of ` 4.44 crore if disposed. Discuss the applicability of Impairment loss.
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.
Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 2016 for ` 60 lakhs. The machine was expected to have a productive life of 6 years. At the end of financial year 2016-2017 the carrying amount was ` 41 lakhs. A short circuit occurred in this financial year but luckily the machine did not get badly damaged and was still in working order at the close of the financial year. The machine was expected to fetch ` 36 lakhs, if sold in the market. The machine by itself is not capable of generating
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