Arrow Ltd acquired a machine for $250 000 on 1 July 2016. It depreciated the

asset at 10% p.a. on a straight-line basis. On 30 June 2018, Arrow Ltd

conducted an impairment test on the asset. It determined that the asset could

be sold to other entities for $154 000 with costs of disposal of $2000.

Management expect to use the machine for the next four years with expected

cash flows from use of the machine being:

2019

$80 000

2020

60 000

2021

50 000

2022

40 000

The rate of return expected by the market on this machine is 8%.

Required

Assess whether the machine is impaired. If necessary, provide the appropriate

journal entry to recognise any impairment loss.

CA of machine at 30 June 2018 = $200,000 [$250k less ($250k / 10 x 2 yrs)]

FV less costs of disposal = $152,000 [$154k less $2k]

Value in use = $194,600 calculated as follows:

[($80k x 0.9259) + ($60k x 0.8573) + ($50k x 0.7938) + ($40k x 0.7350)]

RA = $194,600 [higher of these two]

RA < CA so asset is impaired by $5,400

DR Depreciation - Machine

5 400

CR Accumulated depreciation & impairment losses - Machine

5 400

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