I do not know how to solve the problem. <Question> Delta Company owns plant and

Question

I do not know how to solve the problem.

<Question>

Delta Company owns plant and equipment on the island of Lagos. The cost and carrying amount of the building are £2,800,000 and £2,400,000, respectively. Until this year, the market value of the factory was £7 million. However, a new dictator just came to power and declared martial law. As a result of the changed political status, the future cash inflows from the use of the factory are expected to be greatly reduced. Delta now believes that the output from the factory will generate cash inflows for the next 20 years, as measured by the value in use of £2,000,000. In addition, the market value of the factory building is now just £1,300,000. Delta is not sure how to account for the sudden impairment in value.

Required :

1. Explain how to decide whether an impairment loss is to be recognized.

2. Prepare the necessary journal entry, if any, to account for an impairment in the value of the factory.

Could you help me?

Explanation / Answer

Ans: The Asset is considered to be impaired when the future expected cashflow or its market worth is lower than the book value. Or there is external circumstances which clearly indicates that asset has lost its worth.

Ans 2:

Impaired Value of Property = Lower of market value or expected future cashflows

                                       = $ 1300000

Impairment Loss = $ 2400000-1300000 = $ 1100000

Journal Entry:

     Impairment Loss A/c   Dr 1100000

          To Equipment A/c                  1100000

(being Impairment Loss is recognised)

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