Ali Bhd acquired an equipment at a cost of RM1,200,000 on 1 January 2012. The expected economic life of the equipment was 15 years. On 1 January 2017, a major part of the equipment costing RM300,000 was obsolete and thus was replaced with a new part at a cost of RM520,000. The replacement will improved the performance of the equipment.
Additionally, Ali Bhd also owned a machine used for production of goods. On 1 January 2016, the fair value of the machine owned was RM6,400,000 with remaining useful life of 8 years. An impairment test was then performed on 31 December 2017 when the fair value less cost to sell was RM4,100,000 whereas the value-in-use was determined to be RM4,200,000.
The company’s financial year ends on 31 December each year.
Required: Calculate the impairment loss of the machine on 31 December
To calculate the impairment loss of the machine on 31 December, we need to compare the carrying amount of the machine with its recoverable amount. The higher of the fair value less costs to sell and the value-in-use should be used as the recoverable amount.
Carrying Amount:
The carrying amount of the machine as at 1 January 2017 can be calculated as follows:
Original cost of the machine: RM6,400,000
Less: Accumulated depreciation (6 years * (RM6,400,000 / 8)): RM4,800,000
Carrying amount as at 1 January 2017: RM1,600,000
Impairment Loss Calculation:
Recoverable amount as at 31 December 2017: RM4,200,000 (higher of fair value less costs to sell and value-in-use)
Carrying amount as at 31 December 2017: RM1,600,000
Impairment loss: Carrying amount - Recoverable amount = RM1,600,000 - RM4,200,000 = -RM2,600,000
It appears that the machine is impaired by RM2,600,000 as at 31 December 2017.