QUESTION THREE

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Zanele Manufacturing $($Pty$)$ Ltd$,$ a South African company specializing in heavy machinery production, has been facing market challenges in the financial year ending $31$ December $20$X$3.$ The company's operations include various assets, and the management is concerned about potential impairment due to declining business conditions. The company identified three key assets to be tested for impairment: a manufacturing plant, a piece of machinery, and newly purchased equipment. The first asset under review is Manufacturing Plant A$,$ which was acquired on $1$ January $20$X$0$ for R$6$ million. The plant is being depreciated on a straight$-$line basis over $15$ years, with no residual value. As at $31$ December $20$X$3,$ the plant has accumulated depreciation of R$1\mathrm{.}8$ million. Management has noted a decline in demand for the products produced by this plant, and a decision needs to be made regarding its future utility. After estimating future cash flows, management expects the plant to generate R$3\mathrm{.}2$ million in cash inflows over its remaining useful life. Additionally, external appraisers have estimated that the plant's fair value less costs to sell is R$3\mathrm{.}4$ million.

The second asset, Machinery B$,$ was purchased on $1$ January $20$X$1$ for R$2\mathrm{.}5$ million and is also depreciated on a straight$-$line basis over $10$ years. The carrying amount as of $31$ December $20$X$3$ is R$1\mathrm{.}75$ million. This machine is part of a product line that has been losing market share. Management has determined that the machine's fair value less costs of disposal is R$1\mathrm{.}5$ million. Based on projected future cash flows from this machine, discounted to present value, the value in use is calculated to be R$1\mathrm{.}65$ million.

Finally, Equipment C$,$ purchased on $1$ January $20$X$3$ for R$800,000,$ is also being depreciated on a straight$-$line basis over $5$ years. By $31$ December $20$X$3,$ the accumulated depreciation amounts to R$160,000,$ leaving a carrying amount of R$640,000.$ However, due to a significant downturn in business, management is concerned that the future cash inflows from this equipment may be much

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lower than initially expected. The projected future cash inflows over its remaining useful life are estimated to be R$600,000.$ The fair value less costs of disposal has been assessed at R$650,000.$

Required:

a$.$ Based on IAS $36$ Impairment of Assets, identify the potential indicators of impairment for Manufacturing Plant A$,$ Machinery B$,$ and Equipment C$.$

b$.$ Prepare the journal entries for Zanele Manufacturing for the financial year ending $31$ December $20$X$3$ to record the impairment losses for each of the three assets, if applicable. Your journal entries should reflect the impairment loss and narrations are required.