EZ Bhd bought a plant for RM 225,000 on the 1st of January 2000. EZ Bhd’s depreciation policy is to depreciate this plant for 20 years, assuming a residual value of RM 25,000. On 31st December 2006, due to the production of the plant being lower than expected, EZ Bhd decided to determine whether there is impairment loss of the plant. It was discovered that the net selling price of the plant was RM 138,000 and the value in use of the plant was calculated as RM 143,000.
Required: Calculate the impairment loss of the plant for EZ Bhd and prepare an extract of the Balance Sheet as of 31st December 2006.
To calculate the impairment loss, we need to compare the carrying value of the plant to its recoverable amount. The carrying value is the original cost of the plant minus accumulated depreciation.
Carrying value = Cost - Accumulated depreciation
The cost of the plant is RM 225,000 and it has been depreciated for 7 years. Assuming straight-line depreciation, the annual depreciation expense would be RM (225,000 - 25,000) / 20 = RM 10,000.
Accumulated depreciation = Depreciation expense x Number of years
= RM 10,000 x 7
= RM 70,000
Carrying value = RM 225,000 - RM 70,000
= RM 155,000
The recoverable amount can be determined by comparing the net selling price (RM 138,000) and the value in use (RM 143,000).
Recoverable amount = Max(net selling price, value in use)
= Max(RM 138,000, RM 143,000)
= RM 143,000
The impairment loss is the difference between the carrying value and the recoverable amount.
Impairment loss = Carrying value - Recoverable amount
= RM 155,000 - RM 143,000
= RM 12,000
Therefore, the impairment loss of the plant for EZ Bhd is RM 12,000.
To prepare an extract of the Balance Sheet as of 31st December 2006, we need to adjust the values for the plant.
Original cost: RM 225,000
Accumulated depreciation: RM 70,000
Carrying value: RM 155,000 - RM 12,000 (impairment loss) = RM 143,000
Extract of the Balance Sheet as of 31st December 2006:
Plant: RM 143,000
Less: Accumulated depreciation: RM 70,000
Net carrying value: RM 73,000