As at 1 January 2020, the carrying amount of a machine owned by Lega Harta Bhd was RM30,000. The machine was bought on 3 January 2016 at a cost of RM50,000. The useful life is 10 years and the company uses cost model to subsequently value the machine. During the year 2020, due to the outbreak of a new virus in Vietnam there was a sharp decline in the demand of Lega Harta Bhd’s products. Therefore, as at 31 December 2020, the company decided to perform an impairment test on the machine. It was found out that the value in use was RM22,000 and the fair value less cost to sell was RM20,000.
Based on the information provided, the carrying amount of the machine as at 1 January 2020 was RM30,000. This carrying amount represents the net book value of the machine, which is the original cost of RM50,000 minus any accumulated depreciation.
The machine was purchased on 3 January 2016 at a cost of RM50,000. Given its useful life of 10 years, the company would have been depreciating the machine at a rate of RM5,000 per year, assuming straight-line depreciation.
By the end of 2020, the machine would have been in use for 5 years (2016 to 2020). Therefore, the accumulated depreciation on the machine would be RM25,000 (RM5,000 per year for 5 years).
To calculate the carrying amount as at 1 January 2020, we subtract the accumulated depreciation of RM25,000 from the original cost of RM50,000:
Carrying amount as at 1 January 2020 = RM50,000 - RM25,000 = RM25,000.
However, the given information states that the carrying amount as at 1 January 2020 is RM30,000. This suggests that there might have been some impairments recognized on the machine prior to this date.
The company decided to perform an impairment test on the machine as at 31 December 2020 due to the sharp decline in demand for its products. Two valuation measures were used to determine the potential impairment:
1. Value in use: The value in use represents the present value of the future cash flows expected to be derived from the continued use of the machine. In this case, it is determined to be RM22,000.
2. Fair value less cost to sell: This represents the estimated proceeds from selling the machine in its current condition, after deducting any costs associated with the sale. In this case, it is determined to be RM20,000.
After comparing the carrying amount of RM30,000 to the value in use of RM22,000 and the fair value less cost to sell of RM20,000, it is evident that there is an impairment loss on the machine.
The impairment loss is calculated as the excess of the carrying amount over the higher of the value in use or the fair value less cost to sell. In this case, the value in use of RM22,000 is lower than both the fair value less cost to sell of RM20,000 and the carrying amount of RM30,000.
Therefore, the impairment loss would be RM30,000 - RM22,000 = RM8,000.
As a result, the carrying amount of the machine would be reduced from RM30,000 to RM22,000.