Antique Bhd acquired a machine costing RM500,000 on 1 January 2017. The estimated useful life of the machine was 10 years with scrap value RM5,000. The company adopted cost model in valuation of its machine. On 1 January 2020, the economic performance of the machine was below expectation. The company estimated that it can sell the machine for RM400,000 but it has to incur costs of RM15,000. While, if Antique Bhd continue to use it, the value in use (present value) was RM330,000.
a. Determine the recoverable amount
b. Prepare the journal entries to record the above transactions for the year ended 31
December 2020
a. The recoverable amount is the higher of the fair value less cost to sell and the value in use.
In this case, the fair value less cost to sell is RM400,000 - RM15,000 = RM385,000. The value in use is RM330,000.
Therefore, the recoverable amount is RM385,000.
b. Journal entries:
1 January 2017:
Machine (cost) RM500,000
Cash RM500,000
(To record the acquisition of the machine on 1 January 2017)
31 December 2020:
Impairment loss RM115,000
Accumulated depreciation RM115,000
(To record the impairment loss for the machine)
Machine (cost) RM500,000
Accumulated depreciation RM460,000
Impairment loss RM40,000
(To record the accumulated depreciation and impairment loss for the machine)
31 December 2020 (if the machine is sold):
Cash RM385,000
Machine (cost) RM500,000
Accumulated depreciation RM460,000
Profit on sale of machine RM25,000
(To record the sale of the machine)
31 December 2020 (if the machine is not sold):
No journal entry would be made as there is no change in the carrying amount of the machine.