Question

Daniel Sawmill Ltd(DSL) produces and exports lumber and planks. It owns a plant which has a book value of 1800000cedis as at 1 January 2014. The government of Ghana passed a legislation that restricts the exportation of lumber. Consequently, DSL has to reduce production significantly. Cashflow forecast for the next 4 years included in the budget submitted for management approval in January 2014 shows the ff
Year                                 Cashflow
2014                               550,00
2015                             500,000
2016                             300,000
2017                            700,000
The cashflow forecast for 2017 includes expected proceeds from disposal of the plant. The cash flow projections also ignore the effects of general upwards movement in prices.
It is estimated that if the plant is sold in January 2014, it would realize a net proceeds of 1320000 cedis.
The cost of capital for DSL is 15%(ignoring inflationary effect).
Calculate the recoverable amount of the plant and impairment loss (if any)

Answer 1

Answer : Calculation of Recoverable Amount :

Recoverable Amount is higher of Value in use or Net Realizable proceeds

Net Realizable Proceeds = 1,320,000

Value in Use is the present value of Expected Cash Flows

Below is the table showing Present value of Expected Cash Flows

Year	Cashflow	Present Value Factor @15% [1/ (1 +0.15)^n]	Present value of cash inflow
2014 (n=1)	550000	0.869565217	478260.8696
2015 (n=2)	500000	0.756143667	378071.8336
2016 (n=3)	300000	0.657516232	197254.8697
2017 (n=4)	700000	0.571753246	400227.2719
		Total Present value of cash inflow	1,453,814.845

Therefore Recoverable Amount is higher of 1,453,814.845 or 1,320,000 . .

That is Recoverable Amount = 1,453,814.845

Impairment Loss = Carrying amount - Recoverable Amount

= 1,800,000 - 1,453,814.845

= 346185.155 or 346185.16