Question

Norwel SA manufactures miniature circuit boards used in smartphones. On June 5, 2019, Norwel purchased a circuit board stamping machine at a retail price of €24,000. Norwel paid 5% sales tax on this purchase and hired a contractor to build a specially wired platform for the machine for €1,800, to meet safety requirements. Norwel estimates the machine will have a 5-year useful life, with a residual value of €2,000 at the end of 5 years. Norwel uses straight-line depreciation and employs the "half-year" convention in accounting for partial-year depreciation. Norwel's fiscal year ends on December 31. Instructions a. At what amount should Norwel record the acquisition cost of the machine? b. How much depreciation expense should Norwel record in 2019 and in 2020? c. At what amount will the machine be reported in Norwel's statement of financial position at December 31, 2020? d. During 2021, Norwel's circuit board business is experiencing significant competition from companies with more advanced low-heat circuit boards. As a result, at June 30, 2021, Norwel conducts an impairment evaluation of the stamping machine purchased in 2019. Norwel determines that value-in-use for the machine is estimated to be €15,200 and the fair value of the machine less costs to sell, based on prices in the re-sale market, to be €13,400. Prepare the journal entry to record an impairment, if any, on the stamping machine.

Answer 1

Answer (a):

Acquisition cost = Retail price + Sales Tax + cost of wired platform = 24000 + 24000 * 5% + 1800 = € 27,000

Acquisition cost Norwel should record = € 27,000

Answer (b):

Purchased on Jun 5, 2019

Depreciation = (Acquisition cost - Salvage value) / useful life = (27000 - 2000) / 5 = € 5,000

Norwel use straight line depreciation and employs half year convention for partial year 2019 depreciation = 5000/2 = € 2,500

Hence:

Depreciation expense Norwel should record for 2019 = € 2,500

Depreciation expense Norwel should record for 2020 = € 5,000

Answer (c):

Accumulated depreciation as on Dec 31 2020 = 2500 + 5000 = €7,500

Book value as on Dec 31, 2020 = 27000 - 7500 = €19,500

Amount machine will be reported in Norwel's statement of financial position as on Dec 31, 2020 = €19,500

Answer (d):

Depreciation for 2021 (upto June 30) = 5000 / 2 = €2,500

Accumulated depreciation as on June 30, 2021 = 7500 2500 = €10,000

Book value as on June 30, 2021 = 27000 - 10000 = €17,000

As on Jun 30, 2021:

Value in use = €15,200

Fair Value less cost to sell = €13,400

Higher of 'Value in use' and 'Fair Value less cost to sell' = €15,200

As book value > €15,200, impairment loss is required.

Impairment loss = 17000 - 15200 = €2,200

The journal entry will be:

Credit Date Accounts and Explanation June 30, 2021 Impairment Loss Equipment Debit € 2,200 € 2,200 (to record impairment loss)