Question

Dalaso Plc acquired a piece of machine on 1 June 2017 at a cost of K200,000. This cost is before taking into account trade discount of 5% that Dalaso Plc received on the same date. On 1 June 2018, the machine was revalued to K159,000. During the year to 31 May 2019, there was a reduction in the use of the machine because of decline in demand for Dalaso Pic's products as a consequence of new entrants in the market. This prompted Dalaso Plc to review the machine for impairment. At 31 May 2019, the machine had a fair value less costs to sell of K86,000. Further, Dalaso Plc expects the machine to generate net inflows of K45,000 in each of the last two years of its remaining economic useful life. Dalaso Plc has a policy of transferring to retained earnings an amount representing realised revaluation surplus. Machines are depreciated using straight line method at an annual rate of 25%. Dalaso Plc uses an annual discount rate of 10%. The machine is recorded in the financial statements of Dalaso Plc based on 31 May 2018 carrying value of K142,500. Note: Assume the machine has a nil residual value at the end of its economic useful life. Required Write a report to the Chief Executive Officer that explains: How the above transactions will be treated in the financial statements of Dalaso Plc for the yea ended 31 May 2019. (8 marks) Note: Include relevant calculations in your explanations.

Answer 1

As per the data eet's show the transactions will be treated financial Statements how in Machine Purchase in the year 2017 Lost & 2,00,000 e 5%. Trade discount o discount has to be As we know the trade discount reduced from cost of assets Pese [accounting Standards] Therefore the cost of asset to be recorded 200 ooox 0.95 = 1,90,000 - 2. assest is given as Depreciation of 29% per anum ite 47500 Depreciation p.a on machine @ 190000 x 25/100 Depreciated value as on 1-6-2018 (142500 I [In data ? Revalued value 1 159000 [in data) Revaluation Reserve 16500

The ained amount earnings to be at the transfered to retaine. end for every year te s 5500 3. Evaluation of name of asset (recoverable) cost of assets in books 106000 The fair value ad asset realized on selling 86000 Edata ? Now lets cash calculate the flows (for 2 present value of years] DF CFO Year entrou or Чstb0 0.91 not u0909 37 190 45000 0.83 Present valuo 78 099 so it is very clear that sell the asset at relisable since the present value it's better idea to value of 86000 is 78099, Therefore the 78 099 at the intended to be asset end in has to be revayed at of the year if it as use.

W off to the assets sold lets calculate. 10 6000 Book value Casset] less Revaluation reserve 11000 86000 less : Selling Price 9000 bloss on sale of asset ll the asset is used forther Book value Casset] 1,06000 less: revaluation 11ooo het book value & 95000 0155 Pr of cash flow 70099 Provision for impairment. 16901