On January 1, 2022, the Vallahara Company purchased machinery for P 650,000 which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of P 50,000. Late in 2026, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of five years, over which it estimates the asset will produce total cash inflows of P 1,000,000 and will incur total cash outflows of P 825,000. The cash flows are independent of the company’s other activities and will occur evenly each year. The company is not able to determine the fair value based on a current selling price of the machinery. The company’s discount rate is 10%. Required 1. Prepare schedules to determine whether, at the end of 2022, the machinery is impaired and, if so, the impairment loss to be recognized. 2. If the machinery is impaired, prepare the journal entry to record the impairment.
On January 1, 2022, the Vallahara Company purchased machinery for P 650,000 which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of P 50,000. Late in 2026, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of five years, over which it estimates the asset will produce total cash inflows of P 1,000,000 and will incur total cash outflows of P 825,000. The cash flows are independent of the company’s other activities and will occur evenly each year. The company is not able to determine the fair value based on a current selling price of the machinery. The company’s discount rate is 10%. Required 1. Prepare schedules to determine whether, at the end of 2022, the machinery is impaired and, if so, the impairment loss to be recognized. 2. If the machinery is impaired, prepare the journal entry to record the impairment.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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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Question
On January 1, 2022, the Vallahara Company purchased machinery for P 650,000 which it
installed in a rented factory. It is depreciating the machinery over 12 years by the
straight-line method to a residual value of P 50,000. Late in 2026, because of increasing
competition in the industry, the company believes that its asset may be impaired and will
have a remaining useful life of five years, over which it estimates the asset will produce
total cash inflows of P 1,000,000 and will incur total cash outflows of P 825,000. The
cash flows are independent of the company’s other activities and will occur evenly each
year. The company is not able to determine the fair value based on a current selling price
of the machinery. The company’s discount rate is 10%.
Required
1. Prepare schedules to determine whether, at the end of 2022, the machinery is
impaired and, if so, the impairment loss to be recognized.
2. If the machinery is impaired, prepare the journal entry to record the impairment.
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