You are the controller of ABC Limited (ABCL) and are in the process of determining the value of several items to prepare the year-end financial statements. The company follows IFRS. The items are noted below:

1. ABCL owns a piece of manufacturing equipment that has outdated technology. You suspect that the machinery is impaired and would like to calculate the impairment loss, if any. The equipment will generate the following cash flows over the next three years (at the end of each year):

1. Year 1 = $10,000
2. Year 2= $10,000
3. Year 3 = $5,000

Assume that an appropriate discount rate is 5%. You plan to estimate the equipment’s value in use as a first step. The carrying value before any adjustments is $30,000. Assume the fair value less costs of disposal is equal to the value in use.

2. ABCL has an investment in shares of Boring Limited. The shares trade on the National Stock Exchange.
3. ABCL has recently signed a lease agreement to lease a building for 10 years at a price of $1 million per year (paid at the end of each year). At the end of the lease ,the building reverts to the lessor. The discount rate is 5%.
4. ABCL is planning to issue some bonds before year-end. The 10-year bonds carry interest at 6% (paid annually) and have a face value of $100,000. The market interest rate is 5%. There are no identical bonds in the market.

Required:

1. For the manufacturing equipment, calculate the value in use. Should ABCL recognize an impairment loss? Why or Why not? Calculate the impairment loss (if any).
2. For the investment in shares, identify which level of the fair value hierarchy the asset would be categorized as. Explain why.
3. For the lease, calculate  the PV.
4. For the bonds, calculate the fair value of the bonds. Which model would you use to estimate fair value and why? Which level would you categorize the bonds at in the fair value hierarchy?
5. For all four items, identify sources of measurement uncertainty that you may wish to highlight in the financial statements. (Hint: Include any items that were given in the question that the company would have had to estimate).

Answer rating: 100% (QA)

Solution Answer Ans a VALUE IN USE is 2291329 and the carrying value is 30000 The recoverable amount is equal to the value in use ie is 2291329 and an impairment loss is 708671 And impairment loss is ... View the full answer