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.
Based on the information provided, here is the depreciation and impairment calculation for both the equipment and the machine owned by Ali Bhd:
1. Equipment:
- Cost of equipment: RM1,200,000
- Expected economic life: 15 years
Using the straight-line method, the annual depreciation expense for the equipment is:
RM1,200,000 / 15 years = RM80,000 per year
For the replacement part:
- Cost of replacement part: RM520,000
The remaining useful life of the equipment after the replacement is:
15 years - 5 years (2012-2017) = 10 years
Using the straight-line method, the annual depreciation expense for the replacement part is:
RM520,000 / 10 years = RM52,000 per year
2. Machine owned:
- Fair value on 1 January 2016: RM6,400,000
- Remaining useful life on 1 January 2016: 8 years
Using the straight-line method, the annual depreciation expense for the machine owned is:
RM6,400,000 / 8 years = RM800,000 per year
On 31 December 2017, an impairment test was performed with the following results:
- Fair value less cost to sell: RM4,100,000
- Value-in-use: RM4,200,000
As the fair value less cost to sell is lower than the carrying amount of the machine owned, an impairment loss is recognized. The impairment loss is calculated as:
Carrying amount - Value-in-use = RM6,400,000 - RM4,200,000 = RM2,200,000
However, the impairment loss is subject to a recoverability test. Since the fair value less cost to sell is higher than the value-in-use (RM4,100,000 > RM4,200,000), there is no impairment loss to be recognized.