Question

1. Consider each of the following items:

1. Cost of an oil change on the company’s truck.
2. Cost of major brake replacement in a large piece of construction equipment that is expected to be completed every four years.
3. Lawyers’ fees associated with a successful patent application.
4. Lawyers’ fees associated with an unsuccessful patent application.
5. Cost for the development of a website used exclusively to advertise new products.
6. Cost of permits for building construction.
7. Cost to demolish an old building that is on a piece of land where a new building will be constructed.
8. Market research to find out what attributes people want on their cell phones.
1. Costs required to remove asbestos in building to bring it up to new safety code.
10. Cost to excavate land to make it flat for a building site.
11. Cost of replacing tires in construction equipment expected to last three years.
50. Cost of installing a new roof on the company’s building.
1000. Cost to add new functions to a software package unique to the company.
14. Routine maintenance of website.

Required:

For each of the above items, give the name of the account to which the expenditure should be charged; that is, what account should be debited? Be specific and assume all purchases are made with cash..

Innovative Inc. has a piece of equipment with a carrying amount of $175,000. Technology has changed, indicating that the machine may be impaired. A new machine with updated technology could be purchased for $350,000. A used machine of similar vintage is listed on-line for $160,000. The expected future cash flows from continuing to use the asset are $148,000. The estimated value if the company sold the asset less commission costs is $155,000.

Required:

What is the recoverable amount?

What is the amount of impairment?

Answer 1

8Answer 1

a. Cost of an oil change on the company’s truck.

Repair and Maintenance(oil) A/c Dr.

Cash A/c Cr.

* This expense is a regular nature expense and does not increase permanent efficiency of the assets hence should be charged from P&L Account.

b. Cost of major brake replacement in a large piece of construction equipment that is expected to be completed every four years.

Construction equipment A/c Dr.

Cash A/c Cr.

* This expense increase the efficiency of the asset hence asset should be increased by the amount.

c. Lawyers’ fees associated with a successful patent application

Patent A/c Dr.

Cash A/c Cr.

* This expense is associated with the creation of patent and hence should be added in the value of patent.

d. Lawyers’ fees associated with an unsuccessful patent application

Lawyer's fees(P&L) Dr.

Cash A/c Cr.

* This expense is even though related with the creation of asset but not created successfully hence the expenses related with such asset should be charged to p&l account.

Answer 2

IAS 36 - Impairment of assets

a. Recoverable amount-

Higher of -

• asset's fair value less cost of disposal and
• It's value in use

Equipment's fair value less cost of disposal is $155000, which is sale value of equipment less commission cost.

Equipment's value in use is $148000, which is expected future cash flow from continuing to use the asset.

Recoverable amount is $155000, which is higher of above two amounts.

b. Amount of Impairment

Carrying amount of equipment less Recoverable amount

$175000-$155000 = $20000

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