EZ Bhd bought 5 specialized machines on 1 January 2003. Each machine costs RM 100,000. The machines useful life is 10 years with no residual value. EZ Bhd uses the straight line method of depreciation. Since these machines are specialized, they do not have a market value. On 31 st December 2005, it was found that the demand for the products manufactured by the machines had declined, thus the machines value in use was only RM 320,000. On 31 December 2006, the demand for the product picked up and the value in use of the machines was RM 290,000.
Required: Show the extract of the Balance Sheet as at 31 December 2005 and the extract of the Balance Sheet as at 31 December 2006.
Answer:
31/12/2005
Carrying amount = (RM 100,000 x 5 specialized machine)/ 10 years of useful life
= RM 500,000 – (RM 50,000 x 3 years)
= RM 350,000
Recoverable amount = RM 320,000 CA > RA = Impaired
Impairment loss = RM30,000
HOW TO GET RECOVARABLE AMOUNT
The recoverable amount is determined by comparing the carrying amount of the machines to their value in use. In this case, the carrying amount is RM 350,000 and the value in use is RM 320,000. Since the value in use is less than the carrying amount, it indicates that there is impairment. The impairment loss is then calculated as the difference between the carrying amount and the recoverable amount, which is RM 30,000 in this case.
31/12/2006
Carrying amount = (RM 100,000 x 5 specialized machine)/ 10 years of useful life
= RM 500,000 – (RM 50,000 x 4 years)
= RM 300,000
Recoverable amount = RM 290,000 CA > RA = Not impaired
No impairment loss required as the recoverable amount is greater than the carrying amount.