Question

7.4 Impairment of an individual asset * LO3, 4 On 1 July 2023 an item of equipment is acquired at a cost of $3 million. The asset is to be depreciated using the straight-line method on the basis of an estimated useful life of 15 years and a negligible residual value. On 30 June 2026 it is determined that the asset has a value in use of $2 million and a fair value of $1.8 million before costs of disposal of $50 000. The remaining useful life of the asset is reassessed to be 8 years. On 30 June 2028 it is determined that the asset has a value in use of $1.2 million and a fair value of $1.1 million before costs of disposal of $50 000. The remaining useful life of the asset is reassessed to be 5 years. Required Prepare the journal entries for any depreciation and impairment adjustments on the following dates. 1. 30 June 2026 2. 30 June 2028 3. 30 June 2029

Answer 1

Situation on 30 June 2026

Depreciation has been charged for 2 years i.e from 1 July 2023 to 30 June 2025. We need to charge the depreciation for year 2025-26.

Depreciation amount = 3,000,000/15 = $200,000

Journal for depreciation for the year 2025-26.

Depreciation A/c..............Dr.	200,000
To Machinery A/c	200,000
(Being depreciation charged for the period 2025-26)

Book value of machinery as at 30 June 2026 = 3,000,000 - 200,000*3 = 2,400,000.

The value in use of asset = 2,000,000

Impairment Loss = 2,400,000 - 2,000,000 = 400,000

Journal for impairment loss

Impairment Loss A/c.....Dr	400,000
To Machinery A/c	400,000
(Being recording loss from impairment)

Note : We have taken value in use because it is considered to be all the future cash flows from the asset brought to the present value. That is what impairment means in general.

Situation on 30th June 2028

Depreciation on the machinery has been charged for the 1 year i.e from 30th June 2026 to 30th June 2027. We need to charge depreciation for one year i.e 30th June 2027-28.

Depreciation = 2,000,000/8 = 250,000

Journal for depreciation for the year 2027-28.

Depreciation A/c..............Dr.	250,000
To Machinery A/c	250,000
(Being depreciation charged for the period 2027-28)

Book value of the machinery as at 30th June 2028 = 2,000,000 - 250,000*2 = 1,500,000

Impairment Loss = 1,500,000 - 1,200,000 = 300,000

Journal for impairment loss

Impairment Loss A/c.....Dr	300,000
To Machinery A/c	300,000
(Being recording loss from impairment)

Situation on 30th June 2029

Depreciation is not yet charged. So we will charge the depreciation first.

Depreciation = 1,200,000/5 = 240,000

Journal for depreciation for the year 2028-29

Depreciation A/c..............Dr.	240,000
To Machinery A/c	240,000
(Being depreciation charged for the period 2028-29)

There is no impairment loss. So, no entry for that.

NOTE:
Assumptions : I have assumed that value of machinery is reduced directly. However, you can credit the accumulated depreciation and impairment loss.

The question asked for just impariment and depreciation entries. You can also jounal the cost of disposal as

Cost of Disposal A/c....dr 50,000

To Profit and Loss a/c 50,000

If you have any doubt, ask me in the comment section.