Question

Able purchased a machine for $150,000 on March 1, 2017. The asset has a 5 year life and a $30,000 salvage value. The half year assumption will be used for financial and tax depreciation. Financial reporting will use straight-line depreciation, DDBX (double declining with a switch to straight) will be used for tax purposes. Calculate depreciation for 2017 and 2018 in the space provided below: 2020 2018 2017 Straight line DDBX Assume that income prior to considering tax and depreciation on the machine is $100,000 in 2018. Record the 2018 provision for tax using a 30 % tax rate: Debit Credit Assume that income prior to considering tax and depreciation on the machine is $100,000 in 2020, Record the 2020 provision for tax using a 30% tax rate: Debit Credit Assume that the machine appears to be impaired as of Dec. 31, 2018. Projected cash flows are $20,000 for 4 years. The normal earning rate for such assets is 9% annual. Is the asset impaired?- Numerical support required. If it is impaired, calculate the impairment loss.

Answer 1

All Amount In $

Cost Of Assets 150000

Salvage Value 30000

Life of assets 5 year

Straight Line Depreciation = (Cost Of Assets - Salvage Value) / Useful Life Of Assets  

(150000-30000)/5

24000

Double Declining Method

Rate of Depreciation 100/5 = 20%

Double the Straight Line Rate Of Depreciation is 20*2 = 40%

S.N.	Book Value At The Beginning	Depreciation	Book Value At The end
1	150000	60000	90000
2	90000	36000	54000
3	54000	21600	32400
4	32400	1200	31200
5	31200	1200	30000

in the question given we can switch double declining balance method to straight line method hence we are switching DDBX to Straight Line Method in the year 4 therefore we calculate depreciation as per straight line method for 4th and 5th year for maintain the salvage value at the end of 5th year amounting to Rs. 30000.   

1	Depreciation
		2017	2018	2020
	Straight Line Method	24000	24000	24000
	Double Declining Method	60000	36000	1200

2	Income Prior to depreciation and tax is 100000 in 2018
	Tax Rate 30%
	Income	100000
	Depreciation	36000
	Net Profit Before Tax	64000
	Tax	19200
	Net Profit After Tax	44800
	Income Tax Expenses A/C Dr		19200
		To Provision For Income Tax		19200
	( Being Provision made for income tax )

3	Income Prior to depreciation and tax is 100000 in 2020
	Income	100000
	Depreciation	1200
	Net Profit Before Tax	98800
	Tax	29640
	Net Profit After Tax	69160
	Income Tax Expenses A/C Dr		29640
		To Provision For Income Tax		29640
	( Being Provision made for income tax )

4	Calculation Of Impairment Loss
	Recoverable Amount - Carrying Amount
	Carrying Amount
		Cost of Acquisition - depreciation for 2 year on straight line method
		150000-24000*2
		102000
	Recoverable Amount
		cash flow for 4 year		20000
		Present Value Annuity Factor for 4 year
				3.2397
		Present Value of Cash Flow			64794
		Present Value of Salvage Value
		at the end of 5th year
		Present Value Annuity factor for 5th year
				0.65
		Salvage Value		30000
		Present Value		19500
	Total Recoverable Amount		64794+19500
				84294
	Impairment Loss		102000-84294
			17706