Adora Ltd acquired a machine on 1 July 2007 at a cost of $100,000. The machine h

Question

Adora Ltd acquired a machine on 1 July 2007 at a cost of $100,000. The machine has an expected useful life of 5 years, and the company adopts the straight line basis of depreciation.

Adora Ltd measures the machine at fair value. Movements in fair values are as follows:

30 June 2008 $85,000 Remaining useful life: 4 years
30 June 2009 $60,000 Remaining useful life: 3 years
30 June 2010 $45,000

The company has a financial year ends on 30 June.

Question:

Provide the journal entries used to account for this machine for all the relevant years ending 30 June, showing all necessary workings.

Explanation / Answer

(a) Annual depreciation for the equipment has been $20,000 ($100,000/5years). Book value of the equipment on 30 Jun 2008 is: Original cost ........................................ $100,000 Accumulated depreciation ($20000*1 years) ......... $20,000 Book value ........................................... $ 80,000 According to FASB 144, the existence of impairment is determined by comparing book value of $80,000 to the undiscounted future cash flows of $85,000. The Fair value is higher than BV, so Company will not do anything. No impairment is recognized and no upward revaluation is recorded. . (b) Book value of the equipment on 30 Jun 2009 is: Original cost ........................................ $100,000 Accumulated depreciation ($20000*2 years) ......... $40,000 Book value ........................................... $ 60,000 According to FASB 144, the existence of impairment is determined by comparing book value of $60,000 to the undiscounted future cash flows of $60,000. The Fair value is equal to Book value, so No impairment should be recognized. (c) Book value of the equipment on 30 Jun 2010 is: Original cost ........................................ $100,000 Accumulated depreciation ($20000*3 years) ......... $60,000 Book value ........................................... $ 40,000 According to FASB 144, the existence of impairment is determined by comparing book value of $40,000 to the undiscounted future cash flows of $45,000. The Fair value is higher than BV, so Company will not do anything. No impairment is recognized and no upward revaluation is recorded. .

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